Question

An American worker can produce either 5 cars or 9 tons of grain a year. A Japanese worker can produce either 3 cars or 9 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

Complete the following table with the number of workers needed to make one car or 1 ton of grain in the United States and Japan.

	Workers Needed to Make
	1 Car	1 Ton of Grain
United States	1/5	1/9
Japan	1/3	1/9

Use the blue line (circle symbol) to graph the production possibilities frontier for the American economy. Then use the green line (triangle symbol) to graph the production possibilities frontier for the Japanese economy.

U.S.Japan01002003004005006007008009001000500450400350300250200150100500Cars (Millions)Grain (Millions of tons)900, 0Y-Intercept: 300X-Intercept: NoneSlope: 0

Complete the following table by determining the opportunity cost of a car and of a ton of grain for both the United States and Japan.

	Opportunity Cost of
	1 Car	1 Ton of Grain
	(In terms of tons of grain given up)	(In terms of cars given up)
United States
Japan

Given this information, has an absolute advantage in producing cars, and has an absolute advantage in producing grain.

Also, has a comparative advantage in producing cars, and has a comparative advantage in producing grain.

Assume that without trade, half of each country's workers produce cars and half produce grain.

Complete the following table with the quantities of cars produced and consumed in each country if there is no trade.

	Cars Produced and Consumed	Tons of Grain Produced and Consumed
	(Millions)	(Millions)
United States
Japan

True or False: Both countries would be better off if they produced the good in which they have a comparative advantage and then traded 400 million tons of grain for 200 million cars.

True

False

Answer 1

Opportunity cost is the benefit foregone for undertaking an alternative scope of action, suppose if workers are applied for cars only then there would be no grain.

Table of opportunity cost

	Car		Grain
	Production	Opportunity cost	Production	Opportunity cost
US	500	900/500 = 1.8	900	500/900 = 0.56
J	300	900/300 = 3	900	300/900 = 0.33

Absolute advantage: This is the comparison between two countries, of which one is producing goods more efficiently than other (higher production).

Country US has an absolute advantage of producing both car and grain, since the volume of production for both these products are higher than the country J.

Comparative advantage: This is the comparison between the two countries, of which one country has lower opportunity cost than other.

Country US has the lowest ratio in car and country J has the lowest ratio in grain. Therefore, US has the comparative advantage in producing car and J has the comparative advantage of producing grain.