Law Of Absolute Advantage Case Study

Alyssa Amann

Exercise #3

Exercise #3

a) Law of absolute advantage

a. The Law of Absolute Advantage is the ability of a nation, company or individual to produce a service or good at a lower cost than the cost to which any other nation produces that same good and/or service.

b. An example of absolute advantage is if Germany and the United states can both produce shoes, but Germany can produce shoes at a higher quality at a fast rate, then Germany would have the absolute advantage in the shoe industry. In this case, the United States would better reserve their resources and goods to another industry to which they have the absolute advantage.

b) Law of comparative advantage

a. Comparative advantage is a concept created by the economist David

The United States would have the absolute advantage in trucks because it is overall better at producing them. If Germany and the United States allocates their resources evenly to both cars and trucks their output would be: Cars= 15+15=30, Trucks=12+3=15, therefore the world output would be 45 total units.

c) Labor theory of value

a. Labor theory of value is a theory created by Karl Marx that says the value of a commodity is decisive by the labor that is originated. This theory was made possible because of capitalists getting richer by severely under compensating their workers and charging customers higher prices.

b. An example of this would be any two goods requiring the same amount number of labor hours to produce them should have the same exact market price. This could relate to the production of dolls and vacuum cleaners where they each require 8 hours to complete, therefore, both should have the same price.

d) Opportunity costs

a. Opportunity cost is the benefit of something that must be given up to attain something else. Almost everything has a relation to opportunity cost. For example, for every hour I am in class I give up an hour of free time which could be spent sleeping or watching