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the table below shows the production possibilities of two countries saudia arabia and usa of two...

the table below shows the production possibilities of two countries saudia arabia and usa of two goods oil and beef given a gixed amoumt of resources . oil, beef saudi 500 . 500 usa 500.200 a) which country has an absolute advantage in oil and which has absolute advantage in beef b) calculate saudis opportunity cost of oil in terms of beef c) if the two countries where to specialize and trade with one another which country would import oil d) assume the countries decided to specialize and trade and sttled on trading price of 1.5 oil/beef explain why the usa would experience gains from trade

Expert Solution

Ans : Table showing production possibilities.-:

Country	OIL	BEEF
SAUDI	500	500
USA	500	200

a) Both Saudi and USA can produce equal amount of oil i.e. 500. No country has absolute advantage in oil. Both stand on equal footing.

Saudi has an absolute advantage over USA in Beef production. (i.e. 500>200)

b) Saudi's opportunity cost in terms of beef = Saudi beef production/Saudi oil production

= 500 / 500

= 1.

c) To check the specialisation areas for the countries , we must construct an opportunity cost table-:

COUNTRY

OPPORTUNITY COST

FOR OIL

OPPORTUNITY COST

FOR BEEF

SAUDI

500/500 = 1

500 / 500 = 1

USA

200 / 500 = 0.4

500/200 = 2.5

The country will specialise in that product whose opportunity cost is low.

So , USA specialises in 'OIL' (because 0.4<1) and SAUDI specialises in'BEEF'(because 1 < 2.5).

Therefore , SAUDI will import oil.

d) If the price is settled at 1.5 oil/beef . It means 1.5 is paid for oil and 1 is paid for beef implying that oil is expensive than beef. Since USA specialises in oil and exports it to Saudi , it will generate high income due to higher prices. This will increase their export income and hence USA will gain from trade.

Rahul Sunny answered 2 months ago

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