2015 AP Macroeconomics FRQ #2
Watch me answer it here
Comparative Advantage
(A) Which country has an absolute advantage in producing solar panels?
I like to draw a graph for comparative advantage problems to see graphically the relationship between the production of the two countries.
The most important point of these questions is to be able to tell if the problem is an output or an input problem. If you see the phrase, "using the same amount of resources" it's an output problem.
The phrase means that using the same input variables (resources) one country will be more efficient and will produce more than the other. (efficiency is key).
So, it is clear that with the same inputs (resources) that Country Y can produce more as 12 > 8 solar panels.
A knowledge of what absolute advantage is is helpful, from the cheat sheet.
Answer - One point is earned for stating that Country Y has an absolute advantage in producing solar panels.
(B) Calculate the opportunity cost of a furnace in country Y.
I always make a comparative advantage matrix to calculate these calculations.
So, Country X can make 6 furnaces or 8 solar panels
and, Country Y can make 6 furnaces or 12 solar panels
Since it is an output problem we use the over method.
Output = Over
12 over the 6 and 6 over the 12
This will give us the opportunity cost or what is given up in terms of the good produced.
Understand that what is calculated (in that little box) is what is given up:
To produce 1 furnace we give up 2 solar panels
or said another way, in the other box
To produce 1 solar panel we give up half (.5) of a furnace
Answer - One point is earned for calculating the opportunity cost of a furnace for Country Y:
2 solar panels per furnace.
(C) Which country has the comparative advantage in producing furnaces? Explain.
To figure out the comparative advantage,, we must compare,, so, finish the matrix.
Helpful, if we know what comparative advantage is,, from the cheat sheet.
In comparing who has a comparative advantage it is (always)
the one with the lowest opportunity cost
so, compare the opportunity cost of furnaces with furnaces
and the opportunity cost of solar panels with solar panels.
Compare columns.
Country X gives up (costs) 1.3 solar panels for every furnace produced
compared to
Country Y gives up (costs) 2 solar panels for every furnace produced
Country X has the lower opportunity cost
Country X should produce furnaces
Answer - Country X has the comparative advantage in producing furnaces
Country X has a lower opportunity cost of producing furnaces than Country Y.
(D) If the terms of trade were that 2 furnaces are traded for 1 solar panel, should Country X produce solar panels domestically or import solar panels from Country Y?
As it stands right now, it costs Country X .75 of a furnace to produce 1 solar panel. To give up 2 furnaces for 1 solar panel would be a worse deal. So no deal.
Country X should produce its own solar panels domestically.
Answer - One point is earned for stating that Country X should produce solar panels domestically.
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