b. Explain the term comparative advantage. Based on the information above, calculate which country has a comparative advantage in coconut production and explain why you think the country has a comparative advantage in coconut production.

b. Explain the term comparative advantage. Based on the information above, calculate which country has a comparative advantage in coconut production and explain why you think the country has a comparative advantage in coconut production.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

Solve b part only

6. Suppose Vanuatu and Oman are countries that both produce coconuts and corn which are sold for the same price. Below are various combinations the countries can produce
using the same amount of capital and labour.
Vanuatu
Coconut
(Million bags)
Production and consumption before trade (A) 50
Consumption available after trade (B)
200
Oman
Coconut
Corn
Corn
(Million bags) (Million bags) (Million bags)
100
850
d.
100
110
110
1,000
Table 1. A Table showing production in Vanuatu and Oman
a. Using the information above, draw a PPF (Production Possibilities Frontiers) curve for Oman showing the production and consumption without trade and the
production and consumption with trade (points A and B).
b. Explain the term comparative advantage. Based on the information above, calculate which country has a comparative advantage in coconut production and explain
why you think the country has a comparative advantage in coconut production.
c. Explain what you understand by the term absolute advantage. Based on the theory of absolute advantage, which country do you think should specialize in Corn
production and why do you think so?
Firms and Countries are encouraged by economists to specialize. What is the importance of specialization in macroeconomics?
e. Although Oman produces a lot of Corn, there is a shortage of corn products in the country due to excess exports. Explain 2 policies that the Oman government can
put in place to address this issue.
f. Recently, the governments of Vanuatu and Oman decided to improve trade between the two countries. Explain 2 ways they can do this.

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