International Business
The first thing that can be concluded is that Spain has an absolute competitive advantage in both boats and trucks. Spain's comparative advantage in boats is 3:2 but its comparative advantage in trucks is 2:1. Therefore, Spain should produce trucks and Portugal should produce boats. This is because when a country has absolute advantage in two goods, then comparative advantage is in the good where it has the greater advantage. The other country has comparative advantage in the other good.
If the table illustrates what the productive capacity of the country is where these two goods are produced as a trade-off, then the following conditions exist:
Spain
Portugal
Total
Trucks
Boats
With the new plan, Spain doing trucks and Portugal doing boats, the outputs are as follows:
Spain
Portugal
Total
Trucks
Boats
The total economic output is greater. There are fewer boats -- hopefully these countries didn't need five boats because now they only have four -- but there are many more trucks. Extending the theory, these excess trucks can be traded for more boats (say, from France).
2. Italy has an absolute advantage in both wine and tables. Italy has comparative advantage in wine, with a 5:1. Italy's advantage in tables is just 2:1, which means that Greece has comparative advantage in...
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