Questions 2: The Unit Labor Requirements for the two countries are given in Tabl

Question

Questions 2: The Unit Labor Requirements for the two countries are given in Table 1. Assume that Switzerland has 25 workers (units of labour) and France has 36 workers (units of labour) Table 1 Chocolates Crepe Switzerland 10 France 12 i. France has absolute advantage in ii. France has a comparative advantage in iii. Switzerland has a comparative advantage in iv. (3 points) If the two countries engage in free trade (assume both countries specialize in the production of the good they have comparative advantage in) then Switzerland produces amount of (good) in free trade.

Explanation / Answer

i) Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

France has an absolute advantage in Chocolate and Crepes.

ii) Comparative Advantage

According to this theory, A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Switzerland:

5 chocolates = 10 crepes

1 chocolate = 10/5 = 2 crepes

1 crepe = 5/10 = 0.5 chocolates

Opportunity cost of producing 1 chocolate is 2 crepes and 1 crepe is 0.5 chocolates.

France:

9 chocolates = 12 crepes

1 chocolate = 12/9 = 4/3 = 1.33 crepes

1 crepe = 9/12 = 3/4 = 0.75 chocolate

Opportunity cost of 1 chocolate is 1.33 crepes and 1 crepe is 0.75 chocolates.

France has comparative advantage in the production of chocolate because of lower opportunity cost. On the other hand, Switzerland has comparative advantage in the production of crepe.

So, France has comparative advantage in chocolate.

iii) Crepes

iv) Since, Switzerland has comparative advantage in the production of crepe so it will produce only crepes.

Total production = 25 x 10 = 250 crepes

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