Competitive Analysis and Business Cycles

Module 1 Case Assignment

BUS305

Competitive Analysis and Business Cycles

Market Behavior

1. Explain the concepts of Comparative and Absolute Advantage.

According to the Ricardian model, explained by Steven M. Suranovic, differences in technology vary amongst countries. Absolute and comparative advantages are two ways to define technology differences. However, it is important to define labor productivity for absolute advantage and cost opportunity for comparative advantage in order to grasp the concept between these two methods.

Labor productivity is defined as the quantity of output that can be produced with a unit of labor. Opportunity cost is defined generally as the value of the next best opportunity.

Absolute advantage is by far the most understandable concept. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at a lower cost or with higher productivity. The key is that absolute advantage compares industry productivity across countries, in other words labor productivity.

Comparative advantage is more difficult to understand, and most times analyzed as an absolute advantage. Comparative analysis is the production of a good, if it can produce that good at a lower cost relative to another country. The key is taking fewer resources from one item to produce a good.

In the example assigned between the United States and Canada to illustrate which country should produce wheat, the United States should produce wheat. After calculating the opportunity cost for each country, the United States can produce one unit of wheat with ½ a unit of corn; Canada produces one unit of wheat with 1.6 of corn. In this example, the United States has the lower opportunity cost in wheat, therefore having the comparative advantage in wheat.

2. How does trade affect the production possibilities frontier? Explain.

According to Wikipedia, a production possibility frontier (PPF), also referred to as...