Question

In Country \(\mathrm{A}\), the production of 1 bicycle requires using resources that could otherwise be used to produce 11 lamps. In Country \(B\), the production of 1 bicycle requires using resources that could otherwise be used to produce 15 lamps. Which country has a comparative advantage in making bicycles? \(L O 38.2.\) a. Country A. b. Country B.

Short answer

Country A has a comparative advantage in making bicycles.

Step-by-step solution

Define Comparative Advantage

Comparative advantage refers to a country's ability to produce a good at a lower opportunity cost than another country. We will determine which country gives up fewer lamps to make one bicycle.

Calculate Opportunity Costs

In Country A, the opportunity cost of producing 1 bicycle is 11 lamps (as those resources could instead produce 11 lamps). In Country B, the opportunity cost is 15 lamps (the resources could instead produce 15 lamps).

Determine Lower Opportunity Cost

Comparing the opportunity costs, Country A gives up 11 lamps to produce 1 bicycle, while Country B gives up 15 lamps. Therefore, Country A has a lower opportunity cost for producing bicycles.

Conclude Comparative Advantage

The country with the lower opportunity cost has the comparative advantage. Since Country A sacrifices fewer lamps, it has the comparative advantage in producing bicycles.

Key concepts

Opportunity Cost and Its Significance

Opportunity cost is a crucial economic concept that refers to the value of the next best alternative foregone when a choice is made. In simpler terms, if you choose to do one thing, opportunity cost is what you give up by not doing something else. In the context of the exercise, when Country A or B decides to produce a bicycle, it is giving up producing a certain number of lamps. This number of lamps represents the opportunity cost of producing a bicycle.

Understanding opportunity cost helps in deciding which goods to produce by showing us what will be sacrificed. It ultimately influences economic choices not only on an individual level but also for entire countries and businesses. By determining which resource allocation yields the least opportunity cost, countries can maximize their efficiency and output.

International Trade and Comparative Advantage

International trade is the exchange of goods and services between countries. By trading, countries can specialize in producing goods in which they have a comparative advantage, meaning they can produce them at a lower opportunity cost compared to others.

In the case of Country A and Country B, Country A can produce bicycles more efficiently as it foregoes fewer lamps than Country B for each bicycle made. Through international trade, Country A could decide to specialize in bicycles, while Country B focuses on lamps. This trade can lead to benefits for both, allowing them access to a greater variety of goods than if they attempted to produce everything domestically.

Thus, trade leverages comparative advantage, leading to higher levels of prosperity and efficiency globally.

Bicycle Production and Specialization

Bicycle production, like any manufacturing process, demands careful allocation of resources. It is about finding an efficient balance between various alternatives. In our exercise, Country A and B are weighing between making bicycles or lamps.

Specialization is key in optimizing production and can be based on where each producer has a comparative advantage. Here, Country A shows a natural inclination towards bicycle production because it uses resources that otherwise could produce only 11 lamps, compared to 15 in Country B. This indicates a more efficient use of its resources for bicycles.

By specializing in what they are relatively best at (bicycles for Country A), and potentially trading with Country B, which could specialize in a more lamp-centric production, the overall efficiency is increased.

Resolving Economic Problems Using Comparative Advantage

Economic problem-solving often involves making decisions on allocation and trade to maximize societal welfare. Using the principle of comparative advantage, countries can resolve such problems by choosing to produce goods where they have a lower opportunity cost relative to others.

In our example, through analyzing opportunity costs, we determine the best allocation of resources for Country A and B. The concept aids in identifying where each should focus its production efforts. By doing so, it solves the economic problem of resource scarcity and potential wastage, leading to improved economic outcomes.

Therefore, relying on comparative advantage allows nations to address economic problems in a structured manner by identifying areas of strength and strategically planning resource distribution. This creates a more prosperous and balanced global economy.