Respond to the questions 1, 2, and 3
ACTIVITY 3 COMPARATIVE ADVANTAGE AND INTERNATIONAL TRADE Comparative advantage is a very important concept in economics because it provides the basis for trade between individuals. for trade within a country. and for international trade. When countries specialize in producing those goods that they can make at a lower cost than their trading partners can. total output will be larger than without specialization. if the coun- tries then trade with each other. they are able to consume more than if they were self-suf- cient and didn't trade. In Activity 2. you worked through a problem where Sara and Rob specialized according to their comparative advantage to finish yearbook pages. Use the same concepts now to see how specializing according to comparative advantage can make countries better off. Instead of Sara and Rob, assume that we are looking at two countries, Saratovia and Robland. Like all countries. Saratovia and Robland have limited resources to use in pro- ducing goods and services. People in both coun- tries have decided to use their resources to pro- duce two goods: peanuts and cheese. Assume that a Saratovian. working for one day. can pro- duce either 60 pounds of peanuts or 30 pounds of cheese. A Roblander. working for one day. can produce either 30 pounds of peanuts or 12 pounds of cheese. 1. COST Economists think of cost as what is given up "fallen. one good is produced instead of (mower: l'or example. if people in Robland produce 30 Pounds of peanuts. they give up producing 12 pounds of cheese. So in Robland the cost of 30 Pounds of peanuts is 12 pounds 01 cheese. Since the cost of 12 pounds of cheese ' 30 Pounds of peanuts in Robland. to find the cost of 1 pound of cheese divide both 12 and 30 by 12. Therefore. in Robland the cost of l paund of cheese = 2'}; pounds of peanuts. Since the cost of 12 pounds of cheese = 30 pounds of peanuts in Robland. to find the cost of 1 pound oi peanuts divide both 12 and 30 by 30. Therefore, in Robland the cost of 1 pound oi peanuts is 215 (40%] of a pound of cheese. Now you calculate the cost of cheese and peamits in. Saratovia: The cost of 30 pounds of cheese in Saratovia pounds of peanuts. is The cost of 1 p0und of cheese in Saratovia is _ pounds of peanuts. The cost oi 1 pound of peanuts in Saratovia is pounds of cheese. 2. COMPARA'ITVE ADVANTAGE Peanuts can be produced at a lower cost in , and cheese can be produced at a lower cost in Therefore. Saratovia has the comparative advantage in producing . and Robland has the comparative advantage in pro- ducing 3. Will-10W SPEClAUZATION Suppose that during one day 100 Saratovians can decide to produce any oi the [allowing com- binations ol' cheese and peanuts {in pou nds). They are currently producing the combination shown in the boxes. 2000 pounds of cheese and 2000 pounds of peanuts
