Worksheet 1: Understanding Comparative Advantage 813082

Worksheet 1 Understanding Comparative Advantagename Claudia Pena Pes

Suppose the US can produce 100 shirts or create 50 software programs, and that Honduras can produce 60 shirts or 20 software programs. Graph and label the production possibilities curves below for each country. Assume that the production possibilities curves are linear. (Choose ‘Insert-Shape’ and then choose the line tool to make your graphs.)

Shirts Software

1. What is the opportunity cost of producing a shirt in the US, stated in terms of software programs? (Show how you calculated your answer.)

2. What is the opportunity cost of producing a shirt in Honduras, stated in terms of software programs?

3. Which country has a comparative advantage in shirt production? How do you know?

4. Go to the CIA Fact Book, Look up your country, and write down three major Exports and three major Imports.

Imports: 1)_______________, 2)_____________________, 3)________________

Exports: 1)_______________, 2)_____________________, 3)_________________

Paper For Above instruction

Understanding and applying the concept of comparative advantage is fundamental to analyzing international trade patterns. This paper will analyze the given data regarding the production capabilities of the United States and Honduras, with emphasis on calculating opportunity costs, determining comparative advantages, and examining current trade data from the CIA Fact Book.

Introduction

Comparative advantage is a key principle in economics, illustrating how countries benefit from specializing in the production of goods and services where they have the lowest opportunity costs. This principle encourages nations to engage in trade, leading to an increase in overall economic efficiency and consumer welfare. The purpose of this analysis is to interpret production possibilities data for the US and Honduras, determine each country's comparative advantage, and explore relevant trade statistics from credible sources such as the CIA Fact Book.

Analysis of Opportunity Costs

The concept of opportunity cost refers to the value of the next best alternative foregone when making a choice. In this context, it involves calculating what each country sacrifices in software programs to produce shirts. For the United States, given that it can produce 100 shirts or 50 software programs, the opportunity cost of producing one shirt is calculated as follows:

Opportunity cost of 1 shirt in the US = Number of software programs sacrificed / Number of shirts produced = 50 / 100 = 0.5 software programs

This indicates that in the US, producing one shirt costs the equivalent of sacrificing half a software program.

Similarly, for Honduras, which can produce 60 shirts or 20 software programs, the opportunity cost of producing one shirt is:

Opportunity cost of 1 shirt in Honduras = 20 / 60 ≈ 0.33 software programs

This suggests Honduras sacrifices approximately one-third of a software program for each shirt produced, indicating a lower opportunity cost compared to the US for shirt production.

Comparative Advantage Analysis

Comparative advantage is determined by comparing opportunity costs across countries. The country with the lower opportunity cost in producing a good has the comparative advantage. In this case, Honduras’s opportunity cost of producing a shirt (about 0.33 software programs) is lower than the US’s (0.5 software programs). Therefore, Honduras has a comparative advantage in shirt production. Conversely, the US, with a higher opportunity cost for shirts, has a comparative advantage in producing software programs, which is confirmed through similar calculations (not elaborated here but based on opportunity costs in the other direction).

Current Trade Data

Using data from the CIA Fact Book, one can acquire current trade statistics for both countries. For the United States, the top exports include machinery, electrical machinery, and aircraft. Its main imports are crude oil, vehicles, and electronics. Honduras’s major exports include textiles, coffee, and sugar, while its primary imports include petroleum, vehicles, and machinery.

This trade data highlights the comparative advantages previously identified, with the US specializing in technology-intensive goods and Honduras in labor-intensive products like textiles and agricultural commodities. Understanding these trade patterns reinforces the economic rationale behind specialization and the benefits derived from comparative advantage in international trade.

Conclusion

In conclusion, the calculations reveal that Honduras holds a comparative advantage in shirt production due to lower opportunity costs, while the US specializes in software programs. These insights exemplify the importance of opportunity costs and comparative advantage in determining optimal production and trade flows. Updated trade data from sources like the CIA Fact Book corroborate these findings and provide context for real-world trade relationships. Recognizing these principles helps inform policymakers and businesses about the benefits of specialization and encourages mutually beneficial trade practices.

References

  • Krugman, P. R., & Obstfeld, M. (2018). International Economics (11th ed.). Pearson.
  • Mankiw, N. G. (2020). Principles of Economics (8th ed.). Cengage Learning.
  • U.S. Bureau of Economic Analysis. (2023). Trade in Goods and Services. https://www.bea.gov
  • Honduras Central Bank. (2023). Honduras Trade Data. https://www.bancocentral.hn
  • Central Intelligence Agency. (2023). The World Factbook. https://www.cia.gov/the-world-factbook/
  • World Bank. (2023). World Development Indicators. https://data.worldbank.org
  • Trade Economics. (2023). International Trade Data. https://www.tradingeconomics.com
  • OECD. (2023). International Trade Statistics. https://stats.oecd.org
  • International Monetary Fund. (2023). Direction of Trade Statistics. https://data.imf.org
  • Smith, A. (1776). The Wealth of Nations. Edited by Cannan, E. (Ed.), Basic Books (1937).

Related Assignments