Question

Develop an arithmetic example that illustrates how a nation could have an absolute disadvantage in the production of two goods and still have a comparative advantage in the production of one of them.

Assume that by devoting all of its resources to the production of steel, France can product 40 tons. By devoting all of its resources to televisions, France can produce 60 televisions. Comparable figures for Japan are 20 tons of steel and 10 televisions. In this example, France has an absolute advantage in the production of steel and televisions. France has a comparative advantage in televisions.

Answer 1

Comparative advantages result form lower opportunity costs.

• France's opportunity cost of producing steel instead of TVs = 60 / 40 = 1.5 TVs per ton of steel
• France's opportunity cost of producing TVs instead of steel = 40 / 60 = 0.67 tons of steel per TV

• Japan's opportunity cost of producing steel instead of TVs = 10 / 20 = 0.5 TVs per ton of steel
• Japan's opportunity cost of producing TVs instead of steel = 20 / 10 = 1 tons of steel per TV

France has a comparative advantage in the production of TVs (0.67 < 1), but Japan has a comparative advantage in the production of steel (0.5 < 1.5)