This lesson on input questions based on absolute and comparative advantage will be on the Basic Economic Concepts portion of the AP examination(s).
Different countries have different resources, causing them to have different production possibilities, as learned in past lessons.
Thus, comparing different countries will demonstrate that certain countries will be better or worse at producing certain products than other countries.
In the last lesson, we looked at countries producing different quantities of goods when given the same number of resources.
However, in this lesson, we will look at countries producing the same goods when given different numbers of resources.
For instance, let us say that Countries C and D both produce cars and trucks.
Here are the production times for Country C, given their current resources:
Here are the production times for Country D, given their current resources:
Now, let us compare the production possibilities of the two countries. Since Country D spends less time producing a single car than Country C does, Country D has an absolute advantage in the production of cars.
In addition, since Country C spends less time producing a single truck than Country D does, Country C has an absolute advantage in the production of trucks.
In the last lesson, we learned that a country which has an absolute advantage in the production of a good when it can produce a larger amount of that good with the same amount of resources. To add to that, a country also has an absolute advantage when it can produce the same amount of a good with a smaller number of resources.
However, to calculate which country should produce which good, we must calculate opportunity cost by dividing the number of hours spent by the country on a good by the number of hours spend by the country on the alternative good.
Country C spends 6 hours producing a car and 2 hours producing a track.
Thus, the opportunity cost of producing a car is (6 hours/2 hours), or 3 trucks.
On the other hand, the opportunity cost of producing a truck is (2 hours/6 hours), or 1/3 cars.
Now, we must do the same for Country D.
Country D spends 4 hours producing a car and 3 hours producing a truck.
Thus, the opportunity cost of producing a car is (4 hours/3 hours), or 4/3 trucks.
On the other hand, the opportunity cost of producing a truck is (3 hours/4 hours), or 3/4 cars.
The final step is to compare the opportunity costs, and have the country with the lower opportunity cost for each good produce that good.
Let's look at the opportunity cost of producing 1 car for both countries:
Since Country D has the lower opportunity cost, Country D should specialize in the production of cars.
Now, let's look at the opportunity cost of producing 1 truck for both countries:
Since Country C has the lower opportunity cost, Country C should specialize in the production of trucks.
Therefore, Country C should produce trucks while Country D produces cars.
In other words, Country C has a comparative advantage in the production of trucks, while Country D has a comparative advantage in the production of cars.
A country has a comparative advantage in the production of a good when it can produce the good at a lower opportunity cost than another country.
Specialization is when the country which has a comparative advantage in the production of a good focuses on only producing that good. When each country specializes in the good it has a comparative advantage in producing, it makes the world economy efficient through trade.
In other words, these countries trade the goods which they specialize in exchange for the goods in which other countries specialize, so that each product is made at the lowest possible opportunity cost.
This lesson was (obviously) a simplification of how global trade works, but it gives you a feel for the principles of absolute and comparative advantage.
In this lesson, we covered input questions, which focus on the amount of resources (time in this case) required for countries to produce the same goods.
In the last lesson, we covered an output question, which focuses on the production of goods for countries with the same number of resources.
Different countries have different resources, causing them to have different production possibilities, as learned in past lessons.
Thus, comparing different countries will demonstrate that certain countries will be better or worse at producing certain products than other countries.
In the last lesson, we looked at countries producing different quantities of goods when given the same number of resources.
However, in this lesson, we will look at countries producing the same goods when given different numbers of resources.
For instance, let us say that Countries C and D both produce cars and trucks.
Here are the production times for Country C, given their current resources:
Here are the production times for Country D, given their current resources:
Now, let us compare the production possibilities of the two countries. Since Country D spends less time producing a single car than Country C does, Country D has an absolute advantage in the production of cars.
In addition, since Country C spends less time producing a single truck than Country D does, Country C has an absolute advantage in the production of trucks.
In the last lesson, we learned that a country which has an absolute advantage in the production of a good when it can produce a larger amount of that good with the same amount of resources. To add to that, a country also has an absolute advantage when it can produce the same amount of a good with a smaller number of resources.
However, to calculate which country should produce which good, we must calculate opportunity cost by dividing the number of hours spent by the country on a good by the number of hours spend by the country on the alternative good.
Country C spends 6 hours producing a car and 2 hours producing a track.
Thus, the opportunity cost of producing a car is (6 hours/2 hours), or 3 trucks.
On the other hand, the opportunity cost of producing a truck is (2 hours/6 hours), or 1/3 cars.
Now, we must do the same for Country D.
Country D spends 4 hours producing a car and 3 hours producing a truck.
Thus, the opportunity cost of producing a car is (4 hours/3 hours), or 4/3 trucks.
On the other hand, the opportunity cost of producing a truck is (3 hours/4 hours), or 3/4 cars.
The final step is to compare the opportunity costs, and have the country with the lower opportunity cost for each good produce that good.
Let's look at the opportunity cost of producing 1 car for both countries:
Since Country D has the lower opportunity cost, Country D should specialize in the production of cars.
Now, let's look at the opportunity cost of producing 1 truck for both countries:
Since Country C has the lower opportunity cost, Country C should specialize in the production of trucks.
Therefore, Country C should produce trucks while Country D produces cars.
In other words, Country C has a comparative advantage in the production of trucks, while Country D has a comparative advantage in the production of cars.
A country has a comparative advantage in the production of a good when it can produce the good at a lower opportunity cost than another country.
Specialization is when the country which has a comparative advantage in the production of a good focuses on only producing that good. When each country specializes in the good it has a comparative advantage in producing, it makes the world economy efficient through trade.
In other words, these countries trade the goods which they specialize in exchange for the goods in which other countries specialize, so that each product is made at the lowest possible opportunity cost.
This lesson was (obviously) a simplification of how global trade works, but it gives you a feel for the principles of absolute and comparative advantage.
In this lesson, we covered input questions, which focus on the amount of resources (time in this case) required for countries to produce the same goods.
In the last lesson, we covered an output question, which focuses on the production of goods for countries with the same number of resources.
Key Terms
Absolute Advantage - The advantage a country has when they can produce a greater amount of a good with the same amount of resources as another country or when they can produce the same amount of a good using a lesser amount of resources than another country.
Comparative Advantage - The advantage a country has when they can produce a good at a lower opportunity cost than another country.
Specialization - A country's decision to focus on the production of one good, because they produce this good most efficiently (they have a comparative advantage in the production of this good).
Trade - The exchange of goods by different countries with different specializations, in order to make economies more efficient.
Output Questions - Questions which are based on the production of the same goods by different countries.
Input Questions - Questions which are based on the resources used by different countries to make the same goods.
Review Question(s)
9. What are input questions based on?
a) The fiscal cost to produce goods
a) The fiscal cost to produce goods
b) The amount of resources required for a country to produce a given good
c) A country's GDP
Resources
To review key terms, go to the Quizlet here: https://quizlet.com/346378382/unit-1-lesson-6-absolute-and-comparative-advantage-flash-cards/?new
To watch a video explanation of comparative advantage, go to Jacob Clifford's video here: https://www.youtube.com/watch?v=ol4NexZ0iII
To watch a video practicing input and output questions, go to Jacob Clifford's video here:
https://www.youtube.com/watch?v=z9SAzSm24qg&t=10s
To watch a video practicing input and output questions, go to Jacob Clifford's video here:
https://www.youtube.com/watch?v=z9SAzSm24qg&t=10s
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