Subject: Economics

Name: Hosen Md Emran

Student ID: L202320028
Department: School of Economics and
Management
Major: Management Science and Engineering
(Master’s program 2023)

Course Teacher: Zhang Jianguang, Xiongfeng

School of Economics and Management
 Review
3. Give an example in which one person has an absolute advantage in doing something but
another person has a comparative advantage?

Delve deeper into the example of Alice and Bob to understand how comparative advantage
influences their specialization and trade decisions:

Alice's Absolute Advantage:

 Alice can write more essays and create more graphic designs per hour compared to Bob,
indicating her absolute advantage in both tasks.

Comparative Advantage Analysis:

 To determine comparative advantage, we analyze the opportunity cost of each task.
 The opportunity cost for Alice to write 1 essay is giving up the production of 2 graphic
designs.
 The opportunity cost for Bob to write 1 essay is giving up the production of 1/3 graphic
design.

Comparative Advantage Conclusions:

1. Writing Essays: Alice has a lower opportunity cost for writing essays (2 graphic designs)
compared to Bob (1/3 graphic design). Therefore, Alice has a comparative advantage in writing
essays.
2. Creating Graphic Designs: Bob has a lower opportunity cost for creating graphic designs (3
essays) compared to Alice (5 essays). Therefore, Bob has a comparative advantage in creating
graphic designs.

Specialization and Trade:

 Based on comparative advantage, it is efficient for Alice to specialize in writing essays,
where her opportunity cost is lower, and for Bob to specialize in creating graphic designs.
 By specializing in their respective comparative advantage tasks, Alice and Bob can
maximize their overall output and productivity.
 Through trade, Alice can provide essays to Bob, and Bob can provide graphic designs to
Alice, leading to a mutually beneficial exchange.

Efficient Resource Allocation:

 Specialization and trade based on comparative advantage allow both individuals to
allocate their time and skills efficiently.
 The result is an increase in the total output of essays and graphic designs, benefiting
both Alice and Bob.

In summary, comparative advantage guides individuals to specialize in tasks where they have a
lower opportunity cost, fostering efficient resource allocation and mutually advantageous trade.
A nation will tend to export goods for which it has a comparative advantage. Comparative
advantage, a key concept in international trade theory, suggests that countries should specialize
in producing goods or services where they have a lower opportunity cost compared to other
nations. Here's an explanation:
1. Comparative Advantage Principle:
 Comparative advantage arises when a country can produce a good or service at a lower
opportunity cost than another country. Opportunity cost is the value of the next best
alternative forgone when a choice is made.
2. Specialization and Efficiency:
 When a nation identifies its comparative advantage in the production of certain goods, it
can specialize in those areas. Specialization allows the country to allocate its resources,
including labor, capital, and technology, more efficiently toward the production of
specific goods.
3. Increased Productivity:
 By focusing on producing goods with a comparative advantage, a nation can achieve
higher productivity and output levels. This efficiency results from the fact that resources
are directed to areas where the country faces a lower opportunity cost.
4. Exporting Comparative Advantage Goods:
 Countries are incentivized to export the goods in which they have a comparative
advantage. This is because they can produce these goods at a lower cost compared to
other nations, making their products more competitive in the global market.
5. Importing Goods with Higher Opportunity Cost:
 Conversely, a nation may import goods for which it has a higher opportunity cost of
production. By importing such goods, the country can benefit from the lower opportunity
cost of production in the exporting nation.
6. Mutual Benefit through Trade:
 When nations specialize in producing goods according to their comparative advantage
and engage in international trade, they can achieve mutual benefits. Each nation can
access goods at a lower relative cost by trading with others, leading to a more efficient
allocation of resources globally.

nations will export goods for which they have a comparative advantage because it allows them to
leverage their efficiency and productivity in specific industries. This principle of comparative
advantage serves as a foundation for the positive outcomes of international trade, contributing to
increased global economic efficiency and welfare.

Problems and application

3.
Pat and Kris are roommates. They spend most of their time studying (of course), but they leave
some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to
brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of
root beer and 4 hours to make a pizza.
 A. What is each roommate’s opportunity cost of making a pizza? Who has the absolute
advantage in making pizza? Who has the comparative advantage in making pizza?
B. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for
root beer?
C. The price of pizza can be expressed in terms of gallons of root beer. What is the highest
price at which pizza can be traded that would make both roommates better off? What is
the lowest price? Explain.

A. Opportunity Cost Calculation:

1. Pat's Opportunity Cost (Xpp):
 Time to make a pizza: 2 hours
 Time to brew a gallon of root beer: 4 hours
 O
pportunity Cost ( Xpp)=Time ¿ make a pizza ¿ brew a gallon of root beer ¿= 2 = 1
Time ¿ 4 2
gallon of root beer

2. Kris's Opportunity Cost (Ypk):

 Time to make a pizza: 4 hours
 Time to brew a gallon of root beer: 6 hours

 O pportunity Cost (Ypk )=Time ¿ make a pizza ¿ brew a gallon of root beer ¿= 4 = 2
Time ¿ 6 3
gallon of root beer
Absolute Advantage:
 The roommate who takes less time to make a pizza has the absolute advantage.
 Pat takes 2 hours, while Kris takes 4 hours. Therefore, Pat has the absolute
advantage in making pizza.
Comparative Advantage:
 The roommate with the lower opportunity cost of making a pizza has the comparative
advantage.
1
 Pat's opportunity cost (Xpp) is gallon of root beer.
2
2
 Kris's opportunity cost (Ypk) is gallon of root beer.
3
1 2
 Since < , Pat has the comparative advantage in making pizza.
2 3

 Pat has both the absolute and comparative advantages in making pizza because he takes
less time and has a lower opportunity cost.
 B. Trading Foods:
 If Pat and Kris trade foods, Pat will trade away pizza in exchange for root beer. This
decision is based on comparative advantage. Pat specializes in making pizza where he has
a comparative advantage, while Kris specializes in brewing root beer where she has a
comparative advantage.

C. Price of Pizza in Terms of Gallons of Root Beer:

 Highest Price:
o The highest price would be the highest opportunity cost for the person trading
2
away pizza, which is Kris (Ypk = , gallon of root beer). Therefore, the
3
2
highest price is gallon of root beer per pizza.
3
 Lowest Price:
o The lowest price would be the lowest opportunity cost for the person trading
1
away root beer, which is Pat (Xpp = gallon of root beer). Therefore, the
2
1
lowest price is gallon of root beer per pizza.
2
 Explanation:
1 2
o If the price falls between and gallon of root beer per pizza, both
2 3
roommates would find the trade beneficial. This is because Pat gains more
root beer than he gives up, and Kris gains pizza at a cost lower than her
opportunity cost of making a pizza. This price range represents a mutually
beneficial trade for both roommates.

(6)
The following table describes the production possibilities of two cities in the country of
Baseballia:
Pairs of Red Socks Pairs of Pairs of white Socks Pairs of
White Socks per Worker White Socks per Worker
per Hour per Hour
Boston 3 3

Chicago 2 1

a. Without trade, what is the price of white socks (in terms of red socks) in
Boston? What is the price in Chicago?
 b. Which city has an absolute advantage in the production of each color sock?
Which city has PROBLEMS PROBLEMS AND APPLICATIONS a
comparative advantage in the production of each color sock?
c. If the cities trade with each other, which color sock will each export?
d. What is the range of prices at which trade can occur?

a. Price of White Socks (in terms of Red Socks):

 ¿ Boston : Price of White Socks

Red Socks per Worker per Hour 3

¿ = =1 pair of white socks per pair of red socks.
White Socks per Worker per Hour 3

 In Chicago: Price of White Socks

Red Socks per Worker per Hour 2
¿ = =2 pair of white socks per pair of red socks.
White Socks per Worker per Hour 1

b. Absolute Advantage and Comparative Advantage:

 Absolute Advantage:

 Boston has an absolute advantage in the production of both red and white socks
because it has a higher output per worker per hour in both categories.

 Comparative Advantage:

 To determine comparative advantage, we need to find the opportunity cost of

producing one unit of each sock in each city. The city with the lower opportunity
cost has the comparative advantage.

 In Boston, the opportunity cost of 1 pair of white socks is 1 pair of red

socks (3/3).

 In Chicago, the opportunity cost of 1 pair of white socks is 2 pairs of red

socks (2/1).
  Therefore, Boston has a comparative advantage in the production of white socks,
and Chicago has a comparative advantage in the production of red socks.

c. Sock Export After Trade:

 Boston, with its comparative advantage in white socks, will export white socks.

 Chicago, with its comparative advantage in red socks, will export red socks.

d. Range of Prices for Trade:

 The range of prices at which trade can occur is determined by the opportunity costs of the
two cities:

 Boston's opportunity cost of 1 pair of white socks is 1 pair of red socks.

 Chicago's opportunity cost of 1 pair of white socks is 2 pairs of red socks.

 Therefore, the price of white socks should be between 1 and 2 pairs of red socks to make
trade mutually beneficial for both cities.