Question

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.

Short answer

Yes, it is possible to have a comparative advantage in the production of a good without having an absolute advantage. Although Country A has an absolute advantage in producing both Cars and Bicycles, Country B has a comparative advantage in producing Cars. This is because Country B has a lower opportunity cost (3 Bicycles) compared to Country A (5 Bicycles) for producing a Car.

Step-by-step solution

Understand Absolute Advantage

Absolute advantage is the ability of a country or a producer to produce a good or service with fewer resources than another country or producer. If a country can produce a good more efficiently than another, it has an absolute advantage in producing that good.

Understand Comparative Advantage

Comparative advantage, on the other hand, refers to the ability of a country to produce a particular good or service at a lower opportunity cost than another country. This means that even if a country does not have an absolute advantage in producing a good, it may still have a comparative advantage if it can produce the good at a lower opportunity cost compared to other countries.

Illustrating a Scenario

Let's consider two countries, Country A and Country B, producing two goods, Cars and Bicycles. Here, we use two concepts: labor hours needed to produce a unit (which refers to quantity of resources needed) and opportunity cost. Suppose Country A needs the following hours of labor to produce a unit of each good: - Cars: 10 hours - Bicycles: 2 hours Suppose Country B needs the following hours of labor to produce a unit of each good: - Cars: 15 hours - Bicycles: 5 hours Now, let's calculate the opportunity cost for both countries: - Opportunity cost of producing a Car in Country A: \( \frac{10}{2} = 5 \) Bicycles - Opportunity cost of producing a Car in Country B: \( \frac{15}{5} = 3 \) Bicycles

Interpreting the Scenario

In this scenario, Country A has an absolute advantage in producing both Cars and Bicycles, as it requires fewer labor hours to produce each good compared to Country B. However, Country B has a lower opportunity cost in producing Cars, as it only needs to give up producing three Bicycles compared to Country A's five Bicycles. Thus, even though Country B doesn't have an absolute advantage in producing any good, it has a comparative advantage in producing Cars. This demonstrates that it is possible to have a comparative advantage in the production of a good without having an absolute advantage.