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A numerical example of absolute and comparative advantage

Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn. Further assume that consumers in both countries desire both these goods. These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country. There is only one resource available in both countries, labor hours. Saudi Arabia can produce oil with fewer resources, while the United States can produce corn with fewer resources. [link] illustrates the advantages of the two countries, expressed in terms of how many hours it takes to produce one unit of each good.

How many hours it takes to produce oil and corn
Country Oil (hours per barrel) Corn (hours per bushel)
Saudi Arabia 1 4
United States 2 1

In [link] , Saudi Arabia has an absolute advantage in the production of oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States. The United States has an absolute advantage in the production of corn.

To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see [link] ). We illustrate what each country is capable of producing on its own using a production possibility frontier (PPF) graph, shown in [link] . Recall from Choice in a World of Scarcity that the production possibilities frontier shows the maximum amount that each country can produce given its limited resources, in this case workers, and its level of technology.

Production possibilities before trade
Country Oil Production using 100 worker hours (barrels) Corn Production using 100 worker hours (bushels)
Saudi Arabia 100 or 25
United States 50 or 100

Production possibilities frontiers

These graphs illustrate the production possibilities frontier before trade for both Saudi Arabia and the United States using the data in the table titled “Production Possibilities before Trade”. The x-axis plots corn production, measured by bushels, and the y-axis plots oil, in terms of barrels. All points above the frontier are impossible to produce given the current level of resources and technology.
(a) Saudi Arabia can produce 100 barrels of oil at maximum and zero corn (point A), or 25 bushels of corn and zero oil (point B). It can also produce other combinations of oil and corn if it wants to consume both goods, such as at point C. Here it chooses to produce/consume 60 barrels of oil, leaving 40 work hours that can be allocated to producing 10 bushels of corn, using the data in [link] . (b) If the United States produces only oil, it can produce, at maximum, 50 barrels and zero corn (point A'), or at the other extreme, it can produce a maximum of 100 bushels of corn and no oil (point B'). Other combinations of both oil and corn are possible, such as point C'. All points above the frontiers are impossible to produce given the current level of resources and technology.

Arguably Saudi and U.S. consumers desire both oil and corn to live. Let’s say that before trade occurs, both countries produce and consume at point C or C'. Thus, before trade, the Saudi Arabian economy will devote 60 worker hours to produce oil, as shown in [link] . Given the information in [link] , this choice implies that it produces/consumes 60 barrels of oil. With the remaining 40 worker hours, since it needs four hours to produce a bushel of corn, it can produce only 10 bushels. To be at point C', the U.S. economy devotes 40 worker hours to produce 20 barrels of oil and the remaining worker hours can be allocated to produce 60 bushels of corn.

Questions & Answers

identify and quantify five social costs and social benefits of building a school
Mokgobo Reply
identify and quantity five social costs and social benefits of building a hospital
Mokgobo
short run vs long run
Jean
is it true that the opportunity cost of unemployed labour is zero?
Wisdom Reply
no
Oigebe
give two forms of collusion
nondumiso Reply
1.Explicit Collusion: Also termed overt collusion, this occurs when two or more firms in the same industry formally agree to control the market .
Gafar
2.Implicit Collusion: Also termed tacit collusion, this occurs when two or more firms in the same industry informally agree to control the market, often through nothing more than interdependent actions. A prime example of implicit collusion is price leadership .
Gafar
explicit collusion: this occurs when two or more firms in the same industry legally agree to control the market
Panashe
implicit collusion this occurs when two or more firms in the same industry illegally agree to control the market
Panashe
what is responsible for investigating cases of collusion
nondumiso
reasons why a country maybe involved in international trade
Nde Reply
state five similarities and differences between money market and capital market
Victoria Reply
Give a Zimbabwean example of firms operating in an oligopoly market and illustrate using diagrams how a manager in such a market maximize profit
Pam Reply
what is an industry
EWAH Reply
An industry is the production of goods and related services within an economy
Prabhu
an industry is place where goods and services are produced for human consumption....
Usman
scarcity is the major course of economics problems. discuss
Abdulhameed Reply
please say about that it is interesting for us
Abayneh
what is economics
Michael Reply
economics is a social sciences that deals with the production distribution and consumption of goods and services produced.its study of behaviour between economic agents
rkesh
what is the formula for elasticity of demand
Ridwan
change in demand/change in variable variable may be price, income,
rkesh
seasonal unemployment
Enoch Reply
example agriculture
lungku
want and scarcity
Prince
why the average of revenue AR fun
Abba
What is monopoli
Gadrey Reply
What is monopoly
Gadrey
monopoly
Hanan
monipoly ..where one firm controls all the market
RAM
what is demand
Jafar Reply
demand is what one willing and enable to purchase at a given price over period of a time.
Micheal
what is marginal revenue
just
distinguish between commercialization and industrialization
Alhassan Reply
why division of labour increase economy level of production
Henry Reply
what is opportunity coast
Henry Reply
a benefit profit or value of something that must be given up to acquire achieve something else
ammara
thx
Henry

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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