Use the data table to answer the question that follows.
Production Possibilities for One Year
| | Cheese (millions of tons) | Tomatoes (millions of tons) |
|---|---|---|
| United States | 4 | 2 |
| Italy | 1 | 1 |
Which statement is supported by the data table?
A. The United States has an absolute advantage in producing both cheese and tomatoes.
B. Italy has a comparative advantage in producing both cheese and tomatoes.
C. Neither Italy nor the United States can benefit from specialization and trade.
D. Both Italy and the United States have an absolute production advantage.
Answer (2)
The United States can produce more of both cheese and tomatoes than Italy, giving it an absolute advantage in both.
The opportunity cost of cheese in the US is 0.5 tons of tomatoes, while in Italy it is 1 ton of tomatoes. The opportunity cost of tomatoes in the US is 2 tons of cheese, while in Italy it is 1 ton of cheese.
The US has a comparative advantage in cheese, and Italy has a comparative advantage in tomatoes.
Therefore, the statement supported by the data is that the United States has an absolute advantage in producing both cheese and tomatoes. The United States has an absolute advantage in producing both cheese and tomatoes.
Explanation
Understanding the Problem We are given a production possibilities table for the United States and Italy, showing the amount of cheese and tomatoes each country can produce in one year. We need to determine which statement about absolute and comparative advantage is supported by the data.
Defining Absolute and Comparative Advantage First, let's define absolute and comparative advantage.
Absolute advantage: A country has an absolute advantage in producing a good if it can produce more of that good than another country.
Comparative advantage: A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than another country.
Determining Absolute Advantage Now, let's analyze the data to determine absolute advantage.
The United States can produce 4 million tons of cheese, while Italy can produce 1 million tons. Therefore, the United States has an absolute advantage in cheese production.
The United States can produce 2 million tons of tomatoes, while Italy can produce 1 million tons. Therefore, the United States has an absolute advantage in tomato production.
Thus, the United States has an absolute advantage in producing both cheese and tomatoes.
Calculating Opportunity Costs Next, let's calculate the opportunity costs to determine comparative advantage.
United States:
Opportunity cost of 1 ton of cheese = 4 million tons of cheese 2 million tons of tomatoes = 0.5 tons of tomatoes
Opportunity cost of 1 ton of tomatoes = 2 million tons of tomatoes 4 million tons of cheese = 2 tons of cheese
Italy:
Opportunity cost of 1 ton of cheese = 1 million tons of cheese 1 million tons of tomatoes = 1 ton of tomatoes
Opportunity cost of 1 ton of tomatoes = 1 million tons of tomatoes 1 million tons of cheese = 1 ton of cheese
Determining Comparative Advantage Now, let's determine comparative advantage.
The United States has a comparative advantage in cheese production because its opportunity cost (0.5 tons of tomatoes) is lower than Italy's (1 ton of tomatoes).
Italy has a comparative advantage in tomato production because its opportunity cost (1 ton of cheese) is lower than the United States' (2 tons of cheese).
Evaluating the Statements Finally, let's evaluate the given statements:
"The United States has an absolute advantage in producing both cheese and tomatoes." This statement is supported by the data, as the United States can produce more of both goods than Italy.
"Italy has a comparative advantage in producing both cheese and tomatoes." This statement is incorrect. Italy has a comparative advantage in tomato production, but the United States has a comparative advantage in cheese production.
"Neither Italy nor the United States can benefit from specialization and trade." This statement is incorrect. Both countries can benefit from specialization and trade based on their comparative advantages.
"Both Italy and the United States have an absolute production advantage." This statement is incorrect. Only the United States has an absolute advantage in the production of both goods.
Conclusion Therefore, the statement supported by the data table is: "The United States has an absolute advantage in producing both cheese and tomatoes."
Examples
Understanding absolute and comparative advantage is crucial in international trade. For example, if the US is more efficient at producing cars and computers than Japan, but the opportunity cost of producing computers in the US is very high (it requires shifting resources away from car production), while Japan can produce computers at a lower opportunity cost, then the US should specialize in cars and Japan should specialize in computers. This leads to greater overall production and benefits both countries through trade. This principle applies to various scenarios, from personal decisions about what tasks to focus on to business strategies about which products to develop.
The United States has an absolute advantage in producing both cheese and tomatoes, as it can produce more of each than Italy. In terms of comparative advantage, the US is better at cheese, while Italy has a comparative advantage in tomatoes. Therefore, the correct statement is that the United States has an absolute advantage in both goods.
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