Question

Suppose that Japan can produce 5 cars in 6 hours and 15 HD TVs in 8 hours. The US can produce 5 cars in 7 hours and 15 TVs in 5 hours. Explain which country has a comparative advantage in producing cars and which country has a comparative advantage in producing TVs. In your answer, be sure to be very specific as to how you identified the comparative advantage in each country and define how one goes about identifying comparative advantage.

Assuming that this is what is produced in each country (5 cars and 15 HD TVs), nothing more and nothing less, explain how both countries can benefit through trade. Again, be very specific in terms of identifying the gains from trade and how each country is better as compared to not trading at all.

Answer 1

To compare the productivity in both countries, we have to calculate number of cars and HD TVs produced per hour.

	Cars per hour	HD TVs per hour
Japan	5/6= 0.83	15/8= 1.87
US	5/7= 0.71	15/5= 3

From the table it can be ascertained that Japan has comparative advantage in producing cars (it can produce 0.83 cars in one hour whereas US can produce 0.71 cars in one hour) and US has comparative advantage in producing HD TVs (it can produce 3 TVs in one hour whereas Japan can produce 1.87 TVs in one hour).

The trade can be mutually beneficial if Japan specializes in cars and trades it for HD TVs produced by US. Similarly, US should specialize in HD TVs and trade it for cars produced by Japan.

Through specialization and trading, both countries will be able to reach a higher IC curve. The consumption level of each country will be higher than what it were in autarky. This is known as the gains from trade.