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Suppose that the United States and Saudi Arabia can each produce two products, oil and personal computers. The labor requirements per unit of output are provided in the table below:
Labor Requirements Per Unit of Output
Calculate the labor and opportunity costs for each good, and then compute each countrys absolute and comparative advantage. Use the results to determine what good each country should export and explain your reasoning.
What does absolute advantage mean? How do you calculate absolute advantage?
Which country has an absolute advantage in producing oil? Explain using the data from the table.
Which country has an absolute advantage in producing personal computers? Explain using the data from the table.
What does comparative advantage mean? How do you calculate comparative advantage?
In what output(s) does the U.S. have a comparative advantage? Explain using the data from the table.
In what output(s) does Saudi Arabia have a comparative advantage? Explain using the data from the table.
What product should each country export? Why?
When a U.S. domestic producer begins selling exports, they typically need to worry about the foreign exchange market, since often the revenues an exporter earns are foreign currencies that then need to be traded into dollars. Because the foreign exchange value of the dollar tends to fluctuate, this adds an additional level of risk to the exporters business. What are some factors that would make a domestic producer willing to take on this extra and new type of risk?
Changes in the value of a nations currency affect the nations net exports, and thus GDP. How might this make a large country, like the U.S., more willing to adopt a flexible exchange rate regime than a small country, like Belgium.