2. In Italy, an automobile can be produced by 8 workers in one day and a washing machine by 3 workers in one day. In the United States, an automobile can be produced by 6 workers in one day and a washing machine by 2 workers in one day.
Which country has an absolute advantage in the production of automobiles? In washing machines?
The United States has an absolute advantage in automobile production because it takes fewer Americans (6) to produce a car in one day than Italians (8). The United States also has an absolute advantage in washing machine production because it takes fewer Americans (2) to produce a washing machine in one day than Italians (3).
Which country has a comparative advantage in the production of washing machines? In automobiles?
In Italy the opportunity cost of a washing machine in terms of an automobile is ⅜: ⅜ of a car can be produced with the same number of workers and in the same time it takes to produce 1 washing machine. In the United States the opportunity cost of a washing machine in terms of an automobile is = ⅓: ⅓ of a car can be produced with the same number of workers and in the same time it takes to produce 1 washing machine. Since ⅓ < ⅜, the United States has a comparative advantage in the production of washing machines: to produce a washing machine, only ⅓ of a car must be given up in the United States but ⅜ of a car must be given up in Italy. This means that Italy has a comparative advantage in automobiles. This can be checked as follows. The opportunity cost of an automobile in terms of a washing machine in Italy is
, equal to 2⅔: 2⅔ washing machines can be produced with the same number of workers and in the time it takes to produce 1 car in Italy. And the opportunity cost of an automobile in terms of a washing machine in the United States is
, equal to 3: 3 washing machines can be produced with the same number of workers and in the time it takes to produce 1 car in the United States. Since 2⅔ < 3, Italy has a comparative advantage in producing automobiles.
What pattern of specialization results in the greatest gains from trade between the two countries?
The greatest gains are realized when each country specializes in producing the good for which it has a comparative advantage. Therefore, the United States should specialize in washing machines and Italy should specialize in automobiles.