Absolute Advantage and International Trade - PDF

Running head: MACROECONOMICS
Macroeconomics
Name of the student
Name of the university
Author Note

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Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................2
A)............................................................................................................................................2
B)............................................................................................................................................2
C)............................................................................................................................................3
Answer 3:...................................................................................................................................4
A.............................................................................................................................................4
B.............................................................................................................................................5
C.............................................................................................................................................5
D.............................................................................................................................................5
References:.................................................................................................................................7

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Answer 1:
Absolute advantage refers the ability of a country, company, region or individual to
produce a particular product at a lower cost per unit compare to the other countries, regions
or business entities (Seretis & Tsaliki, 2016).
Comparative advantage, on the other side, refers the situation when a country, region
or business entity produces any particular product at a lower opportunity cost compare to
others (Laursen 2015).
To trade between two individuals or countries, it is essential to determine the
comparative advantage of them. By following this concept, a country needs to sacrifices
fewer amount of one good for producing the other one by more amounts.
Answer 2:
Calculation per hour PPT per hour
Larry 10 10
kate 12 20
A) Larry needs 10hours for calculation an 10 hours for PPT while Kate needs 12 hours the
same calculation and 20 hours for this PPT.
Larry and Kate together need the time for the calculation = (10+ 12)/ 2 11 hours
Moreover, they together need the time for preparing calculation= (10+ 20)/ 2= 15 hours
B)
Calculation per hour PPT per hour
Larry 10/10 = 1 10/10 = 1
kate 12/20 = 0.6 20/12 = 1.67
According to the above table, Kate has comparative advantage for doing calculation and
consequently, Larry has comparative advantage for preparing PPT.
Hence, based on comparative advantages, two students can complete this within (12+10) = 22
hours

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C) The total of Larry
 For calculation is $ (5* 10) = $ 50
 For preparing PPT = $ (5* 10) = $50
The total cost of Kate
 For calculation is $ (5* 12) = $ 60
 For preparing PPT = $ (5* 20) = $100
Hence, the opportunity cost of Larry for choosing PPT over calculation is = Total cost for
calculation/ Total cost for PPT= $(50/50) = $1
For choosing calculation over PPT is = Total cost for PPT/ Total cost for calculation=
$(50/50) = $1
The opportunity cost of Kate for choosing calculation over PPT is =Total cost for PPT/Total
cost for calculation = $(100/60) = $ 1.67
For choosing PPT over calculation is =Total cost for calculation/Total cost for PPT =
$(60/100) = $ 0.6
Kate has the better solution for choosing calculation over PPT as where she can sacrifice
comparatively lower cost. However, for Larry, this opportunity cost is same (Chodorow-
Reich, & Karabarbounis, 2016). Therefore, she can choose any one of the task.

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Answer 3:
A.
Figure 1: Production possibility frontier for country A
Country A is going to produce peanuts worth 125 units and popcorn worth 75 units.
Figure 2: Production possibility frontier for country B
Country B is going to produce 50 units of peanuts and 150 units of popcorn
A
A

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B.
During the autarky position, total amount of peanuts production is:
 (125+50) = 175 units
Total amount of popcorn production is:
 (75+150) units= 225 units
C.
Peanuts Popcorn
Country A 250/150= 1.67 150/250= 0.6
Country B 100/300= 0.33 300/100= 3
Country A has comparative advantage in producing peanuts by 250 units and country B is
producing 300 units of output.
D.
Country is going to produce 250 units of peanuts within which it would trade 100
units to country B, leaving 150 within home country. Moreover, it is going to receive 100
units of popcorn from country B. On the other side, country B is going to export 100 units of
popcorn to country A remaining excess 200 units in home country (Levchenko & Zhang,
2016). Moreover, it is receiving 100 units of peanut from A.
Journal Entry:
 Amount produced within a day: between two individuals A and B:
Flour (Kg/ day) Wheat (Kg/day)
Person A 3 6
Person B 4 12
The above figure has represented the absolute advantage for producing both flour and
wheat for person A. On the other side, person B has comparative advantage to produce wheat.

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In this context, it can be said that both person can be benefited if they trade with each
other based on comparative advantages. By doing so, each person can produce entire amount
of that output from which they can receive comparative advantage (Nunn & Trefler, 2014).
However, if person A tries to produce both wheat and flour in domestic market then total no
one product cannot be produced at its highest amount.
 Within a circular flow diagram, two types of economic agents chiefly operate their
business, which are, firm and household. However, to operate import and export as an
economics agent, it can be beneficial to operate under five-sector model (Murray,
Skene & Haynes, 2017). The model is divided among five sectors, which are,
household, financial, government, borrowing and external one.
Figure 3: Five-sector model under circular flow of income
Source: (created by author)

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References:
Chodorow-Reich, G., & Karabarbounis, L. (2016). The cyclicality of the opportunity cost of
employment. Journal of Political Economy, 124(6), 1563-1618.
Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), 99-115.
Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage:
Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.
Murray, A., Skene, K., & Haynes, K. (2017). The circular economy: an interdisciplinary
exploration of the concept and application in a global context. Journal of Business
Ethics, 140(3), 369-380.
Nunn, N., & Trefler, D. (2014). Domestic institutions as a source of comparative advantage.
In Handbook of international economics (Vol. 4, pp. 263-315). Elsevier.
Seretis, S. A., & Tsaliki, P. V. (2016). Absolute Advantage and International Trade: Evidence
from Four Euro-zone Economies. Review of Radical Political Economics, 48(3), 438-
451.