Consider two countries, Country X and Country Y, which produce only two goods: cars and bicycles. Country X can produce 200 cars or 600 bicycles per month, while Country Y can produce 150 cars or 300 bicycles per month.
a. Calculate the opportunity cost of producing one car in each country.
b. Calculate the opportunity cost of producing one bicycle in each country.
c. Based on your calculations, which country has a comparative advantage in producing
cars?
d. Which country has a comparative advantage in producing bicycles?
e. Who has the absolute advantage in bicycles?
a.
- Country X: Opportunity cost of producing one car = 600 bicycles / 200 cars = 3 bicycles
- Country Y: Opportunity cost of producing one car = 300 bicycles / 150 cars = 2 bicycles
b.
- Country X: Opportunity cost of producing one bicycle = 200 cars / 600 bicycles = 1/3 car
- Country Y: Opportunity cost of producing one bicycle = 150 cars / 300 bicycles = 1/2 car
c. Country Y has a comparative advantage in producing cars, as it has a lower opportunity cost (2 bicycles compared to 3 bicycles for Country X).
d. Country X has a comparative advantage in producing bicycles, as it has a lower opportunity cost (1/3 car compared to 1/2 car for Country Y).
e. Country X has the absolute advantage in bicycles, as it can produce more bicycles per month (600 bicycles compared to 300 bicycles for Country Y).