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Who has the comparative advantage in the following scenario?Suppose that Sweden and...

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maheen100 | Student, Undergraduate | (Level 1) Honors

Posted September 18, 2012 at 11:50 PM via web

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Who has the comparative advantage in the following scenario?

Suppose that Sweden and Greece both produce oil and cheese.. Sweden's oppurunity cost of producing a kg of cheese is 8 barrels of oil, while greece's oppurtunity cost of producing a kg of cheese is 3 barrels of oil.

 

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 19, 2012 at 12:04 AM (Answer #1)

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In this scenario, each country has a comparative advantage in one product.  Sweden has the comparative advantage in producing oil while Greece has the comparative advantage in producing cheese.

A country has the comparative advantage when it can produce something at a lower opportunity cost than another country.  In this scenario, we are clearly told that Greece has a lower opportunity cost for making cheese.  Its opportunity cost for a kilogram of cheese is only 3 barrels of oil compared to Sweden's cost of 8.  When turned around, this tells us that Sweden has a comparative advantage in producing oil.  Sweden only gives up 1/8kg of cheese to produce a barrel of oil while Greece gives up 1/3kg.

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