Comparative Advantage?

Question

I am really stuck here

Labor hours needed to make one unit of:

(Switzerland) Clocks - 6 Umbrellas -2

(England) Clocks - 3 Umbrellas - 4

Amount produced in 24 hours:

(Switz) Clocks - 4 Umbrellas - 12

(Eng) Clocks - 8 Umbrellas - 6

Given the information in the table above, if Switzerland and England trade based on the principle of comparative advantage, Switzerland will export ____________, and England will export ________________.

A. clocks, umbrellas

B. umbrellas, clocks

C. neither good, both goods

D. both goods, neither good

I can figure out the opportunity cost for part of the problem...like 12 / 4 = 3........but when you go the other way in all the examples that I see they come up with a fraction. I guess I am just not sure how to find the opportunity cost and then how to compare them from there. I am confused. Can anyone please help?????

Answer 1

You don't need to find out opportunity cost... compare the relative prices.

The answer is B.

Answer 2

The point with comparative advantage is the internal opportunity cost a country faces - how many units of a good must be given up to produce another. So here, Switzerland can make a clock with 6 hours of labour input, but an umbrella with just 2 hours. In effect, producing a clock 'costs' Switzerland 3 umbralla units of production as the labour is not available to make them. England however can make clocks in 3 hours and umbrellas in 4 hours, so the implicit cost of a clock is only 3/4, or 0.75 umbrella units. Therefore, England is said to have a comparative advantage in clock production, and vice versa for Switzerland and umbrellas in the same way, so the answer is B.

The main insight of comparative advantage is that that kind of calculation will work when one country is better/quicker at producing both goods that are traded, not just one like in the example. If Switzerland was better at making clocks as well as umbrellas, comparative advantage would show that both countries can still benefit by specialising and trading. Hope that helps anyway!