Exercise: Comparative Advantage

Name: Olivia Gabbay

Macroeconomics

Australia & New Zealand are quite advanced in both beef & dairy production. Given the same amount of
resources & time:

Australia can produce either 12 tonnes of dairy, or 15 tonnes of beef. New Zealand can produce either 12
tonnes of dairy, or 6 tonnes of beef.

1. Given the above information, which country has absolute advantage in dairy production?

 Neither: 12-12

2. Which country has absolute advantage in beef production?

 Australia: 15>6

3.

 The opportunity cost of 1 tonne of dairy for Australia is

 15/12= 1.25 T of beef

 The opportunity cost of 1 tonne of beef for Australia is

 12/15= 0.8 T of dairy

 The opportunity cost of 1 tonne of dairy for New Zealand is

 6/12= 0.5 T of beef

 The opportunity cost of 1 tonne of beef for New Zealand is

 12/6= 2 T of dairy

Hint: in addition to the numbers, you must also write the correct units.

4. If the countries were to trade, which country should specialize in which product? Briefly explain

why.

 Australia should specialize in beef bc it has comparative advantage: lower opportunity

cost for making beef

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