Absolute

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Absolute comparative advantage

• Argentina and Brazil each have 10,000 hours of
  labor per month, and the following technologies
• Argentina
• producing one pound coffee requires 2 hours
• producing one bottle wine requires 4 hours
• Brazil
• producing one pound coffee requires 1 hour
• producing one bottle wine requires 5 hours
• 1. Please draw the PPF of these two countries
  (measure wine on the horizontal axis). If they
  use half of the labor hours to produce each good
  and do not trade with each other, what is their
  consumption and production?
• 2. Compute a table of opportunity cost as we did
  in the previous class.
• Find out which country has an absolute advantage
  in the production of coffee? Wine? Which country
  has a comparative advantage in the production of
  coffee? Wine?
• If Brazil only produces coffee and Argentina
  only produces wine and they agree to exchange one
  bottle of wine for three pounds of coffee and
  exchange 1200 bottles of wine, what is their
  production and consumption in this case?
• What are the gains from trade?

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