Assume that Germany can produce 10 million bottles of beer or 4 million bottles of vodka. Further assume that Russia can produce 7 million bottles of beer or 3 million bottles of vodka. As a result, which of the following is true with regard to absolute and comparative advantage?

Question

Quizplus · Accepted Answer

Germany can produce more bottles of beer and vodka than Russia, so it has the absolute advantage in both products. However, comparative advantage considers the opportunity cost of producing one good over the other. In this case, Germany's opportunity cost of producing one bottle of beer is 0.4 bottles of vodka (10 million beer / 4 million vodka) while Russia's opportunity cost of producing one bottle of beer is 0.43 bottles of vodka (7 million beer / 3 million vodka). Thus, Germany has the comparative advantage in beer because it gives up less vodka to produce one unit of beer than Russia.

Assume That Germany Can Produce 10 Million Bottles of Beer