What is the absolute advantage and comparative advantage whe

Solution

Table of production

Countries

Productions (suppose in 1 hour)

Banana

Car

Country V

40

35

Country C

20

30

Absolute advantage: This is the comparison between two countries, of which one is producing goods more efficiently than other.

Country V has absolute advantage of producing both banana and car, since the amounts of production for both these products are higher than the country C.

As per the absolute advantage, country V should export both banana and car to the country C.   

Comparative advantage: This is the comparison between the two countries, of which one country has lower opportunity cost than other.

Opportunity costs are given below:

Country V

35/40 = 7/8

40/35 = 8/7

Country C

30/20 = 3/2

20/30 = 2/3

Country V has the lowest ratio in banana and the country C has the lowest ratio in car. Therefore, V has the comparative advantage in producing banana and C has the comparative advantage of producing car.

As per the comparative advantage, country V should export banana to the country C and country C should export car to the country V.