Let’s imagine there are two nations led by Andrew and Quach. Once rival nations, the two...

Let’s imagine there are two nations led by Andrew and Quach. Once rival nations, the two have come to terms and are exploring trade opportunities. Both of their nations happen to produce Soy Beans and Chickens – a very exciting economy. Every year Andrew's nation can produce 120 million pounds of soy beans, employing their full resources, or they can produce 30 million chickens. Alternatively, Quach's nation can produce 40 million pounds of soy beans, employing their full resources, or they can produce 20 million chickens.

1. What are Andrew's and Quach's opportunity costs for soy beans and chickens?

2. Do any absolute and comparative advantages exist? If so, who has these advantages and in what products?

3. If they decide to specialize and trade, who should specialize in soy beans? Who should specialize in chickens?

4. What is the optimal range of prices in terms of pounds of soy beans per chicken at which the two nations would be willing to trade?

Solutions

Expert Solution

1. Andrew's nation:

It can produce 120 million pounds of soybeans or 30 million chickens.

The opportunity cost of producing 1 pound of soybeans = 30 million/120 million = 0.25 chicken

The opportunity cost of producing 1 chicken = 120 million/30 million = 4 pounds of soybeans

Quach's nation:

It can produce 40 million pounds of soybeans or 20 million chickens.

The opportunity cost of producing 1 pound of soybeans = 20 million/40 million = 0.5 chicken

The opportunity cost of producing 1 chicken = 40 million/20 million = 2 pounds of soybeans

2. Andrew's nation can produce a higher quantity of both soybeans and chickens. Therefore, Andrew's nation has an absolute advantage in producing both soybeans and chickens.

The opportunity cost of producing 1 pound of soybeans is lower for Andrew's nation. Therefore, Andrew's nation has a comparative advantage in the production of soybeans

The opportunity cost of producing 1 chicken is lowe for Quach's nation. Therefore, Quach's nation has a comparative advantage in the production of chickens.

3. Each nation should specialize in the production of the good in which one has a comparative advantage.

Therefore, Andrew's nation should specialize in the production of soybeans and Quach's nation should specialize in the production of chickens.

4. In order for the trade be beneficial to both the nations, the terms of trade must be between their respective opportunity costs of production.

Therefore, the acceptable terms of trade are:

1 chicken is exchanged for 2 pounds - 4 pounds of soybeans.

Rahul Sunny answered 1 year ago

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