Consider two countries: Country A can produce six automobiles or twelve movies with the same amount of resources. Country B can produce five automobiles or eight movies with the same amount of resources. Using Ricardo's Theory of Comparative Advantage, determine which country will produce automobiles, which will produce movies, and the range of relative prices for these products within which these counties trades?

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11 February, 11:28

Consider two countries: Country A can produce six automobiles or twelve movies with the same amount of resources. Country B can produce five automobiles or eight movies with the same amount of resources. Using Ricardo's Theory of Comparative Advantage, determine which country will produce automobiles, which will produce movies, and the range of relative prices for these products within which these counties trades?

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Mickey · Answer 1

Country A can produce 6 automobiles or 12 movies:

Opportunity cost of producing 1 automobile = 12 : 6

= 2 movies

Opportunity cost of producing 1 movie = 6 : 12

= 0.5 automobiles

Country B can produce 5 automobiles or 8 movies:

Opportunity cost of producing 1 automobile = 8 : 5

= 1.6 movies

Opportunity cost of producing 1 movie = 5 : 8

= 0.625 automobiles

Since,

Country A has a comparative advantage in producing movies. Country A has a lower opportunity cost in producing movies than country B, so, country A is producing movies.

Country B has a comparative advantage in producing automobiles. Country B has a lower opportunity cost in producing automobile than country A, so, country B is producing automobiles.

The range of relative prices:

For Country A: Movies

0.5 < P < 0.625

For Country B: Automobiles

1.6 < P < 2