Question

The following table shows the number of weeks of labor required to produce 1 unit of each good in each country

Country	Beef	Petroleum
Denmark	6 weeks	5 weeks
Western Sahara	20 weeks	40 weeks

1. Which country has the absolute advantage in beef? Which in petroleum?
2. Which country has the comparative advantage in beef? Which in petroleum?
3. Suppose Denmark has 600 weeks of labor available. Construct a production possibilities frontier for Denmark.
4. Construct the Danish consumption possibilities frontier if the terms of trade are 1 beef = 0.75 petroleum.

Answer 1

1.

Denmark has absolute advantage in production of beef as well as petroleum both, due to the higher efficiency of production in both type of goods. It is due to the reason that Denmark takes relatively lesser weeks to produce both the goods than that if Western Sahara.

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2.

Suppose, 120 weeks are available for both nations, then.

Beef produced by Denmark = 120/6 = 20 units

Petroleum produced by Denmark = 120/5 = 24 units

Also,

Beef produced by Western Sahara = 120/20 = 6 units

Petroleum produced by Western Sahara = 120/40 = 3 units

So,

Opportunity cost of producing beef by Denmark = 24/20 = 1.2 units of petroleum

Opportunity cost of producing beef by Western Sahara = 3/6 = .5 units of petroleum

Hence, Western Sahara has comparative advantage in producing beef and Demark as comparative advantage in producing petroleum on the basis of lower opportunity costs.

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3

If 600 weeks of labor are for Denmark,

Then,

Beef to be produced = 600/6 = 100

Petroleum to be produced = 600/5 = 120.

So, PPF for Denmark is as follows:

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4.

With the given trade terms, 120 units of petroleum = 120/.75 = 160 units

So,

consumption possibilities frontier is as follows.