Macroeconomics

‭trucks‬‭and‬‭0‬‭helicopters,‬‭or‬‭40‬‭helicopters‬‭and‬‭0‬‭trucks,‬‭or‬‭any‬‭combination‬‭represented‬‭by‬‭the‬‭orange‬ ‭line.‬

‭First, calculate the opportunity cost of producing 1 truck in each country:‬ ‭ ➔ ‬ ‭Sweden:‬ ‭to‬ ‭produce‬ ‭30‬ ‭trucks,‬ ‭10‬ ‭helicopters‬ ‭are‬ ‭foregone‬ ‭→‬ ‭10/30‬ ‭≈‬ ‭0.33‬ ‭helicopters‬ ‭lost‬ ‭per‬ ‭each‬ ‭truck produced.‬

‭ ➔ ‬ ‭Japan:‬ ‭to‬ ‭produce‬ ‭20‬ ‭trucks,‬ ‭40‬ ‭helicopters‬ ‭are‬ ‭foregone‬ ‭→‬ ‭40/20‬ ‭=‬ ‭2‬‭helicopters‬‭lost‬‭per‬‭each‬‭truck‬ ‭produced.‬ ‭Since‬ ‭it‬ ‭costs‬‭Sweden‬‭less‬‭to‬‭produce‬‭trucks‬‭in‬‭terms‬ ‭of‬ ‭the‬ ‭quantity‬ ‭of‬ ‭helicopters‬ ‭sacrifced‬ ‭(0.33‬ ‭<‬ ‭2),‬ ‭Sweden‬ ‭has‬ ‭a‬ ‭comparative‬ ‭advantage‬ ‭in‬ ‭truck‬ ‭production and should specialize in that.‬

‭Now, calculate the opportunity cost of producing 1 helicopter in each country:‬ ‭ ➔ ‬ ‭Sweden:‬ ‭to‬ ‭produce‬ ‭10‬ ‭helicopters,‬ ‭30‬ ‭trucks‬ ‭are‬ ‭foregone‬ ‭→‬ ‭30/10‬ ‭=‬ ‭3‬‭trucks‬‭lost‬‭per‬‭each‬ ‭helicopter produced.‬ ‭ ➔ ‬ ‭Japan:‬ ‭to‬ ‭produce‬ ‭40‬ ‭helicopters,‬ ‭20‬ ‭trucks‬ ‭are‬ ‭foregone‬ ‭→‬ ‭20/40‬ ‭=‬ ‭0.5‬‭trucks‬‭lost‬‭per‬‭each‬ ‭helicopter produced.‬ ‭Since it costs Japan less to produce helicopters in terms of the quantity of trucks sacrifced (0.5 < 3),‬ ‭Japan has a comparative advantage in helicopter production and should specialize in that.‬ ‭After specialization, the total output would become 30 trucks and 40 helicopters. Through trade,‬ ‭Sweden and Japan can exchange their produced goods, leading to mutual beneft and overall effciency‬ ‭in resource utilization.‬ ‭Comparative Advantage Using the Input Approach‬ ‭We‬ ‭have‬ ‭already‬ ‭calculated‬ ‭and‬ ‭identifed‬ ‭comparative‬ ‭advantages‬ ‭based‬ ‭on‬ ‭output‬ ‭or‬ ‭the‬ ‭level‬ ‭of‬ ‭production‬ ‭of‬ ‭economies‬ ‭(i.e.,‬ ‭the‬ ‭quantity‬ ‭of‬ ‭products‬ ‭produced).‬ ‭However,‬ ‭in‬ ‭certain‬ ‭cases,‬ ‭we‬ ‭are‬ ‭provided‬‭with‬‭input‬‭data‬‭instead‬‭of‬‭total‬‭output.‬‭This‬‭data‬‭can‬‭include‬‭variables‬‭such‬‭as‬‭the‬‭number‬‭of‬ ‭hours‬‭worked,‬‭the‬‭number‬‭of‬‭workers‬‭employed,‬‭and/or‬‭the‬‭amount‬‭of‬‭capital‬‭used‬‭to‬‭produce‬‭units‬‭of‬ ‭output.‬‭In‬‭such‬‭cases,‬‭the‬‭economy‬‭that‬‭uses‬‭fewer‬‭resources‬‭to‬‭produce‬‭a‬‭higher‬‭output‬‭of‬‭a‬‭product‬ ‭has a lower opportunity cost and is therefore said to have a comparative advantage.‬ ‭Example:‬ ‭Assume‬ ‭that‬ ‭China‬ ‭and‬ ‭Singapore‬ ‭both‬ ‭produce‬ ‭chairs‬ ‭and‬ ‭tables.‬ ‭The‬ ‭following‬ ‭table‬ ‭represents the number of hours required to produce one unit in each country.‬

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