4 Suppose Country A produces 10 chairs or 6 tables using its

4. Suppose Country A produces 10 chairs or 6 tables using its resources, and Country B produces 12 chairs or 18 tables using its resources. Determine the comparative advantage both countries enjoy

Solution

When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other.

The country A, the opportunity cost of producing chairs in terms of tables is 6/10 =0.6 table per chair.

The country B,the opportunity cost of producing chair in terms of tables is 18/12=1.5 table per chair.

The opportunity cost of producing chair in terms of table is lower in country A so country A has comparative advantage in producing the Chairs.

Similarly,

the opportunity cost of producing a table in country A is 10/6=1.6

and the opportunity cost of producing a table in country B is 12/18=0.6

So,country B has a comparative advantage in producing table.