Question

Assume that an American worker can produce 5 cars per year of 10 tons of grain per year, whereas a Japanese worker can produce 15 cars per year or 5 tons of grain per year. Assume labor is the only input used in car and grain production.

a) Which country has the absolute advantage in producing cars? In producing grain? Briefly explain.

b) For the United States, what is the opportunity cost of producing a car? What is the opportunity cost of a ton of grain? Show your work.

c) For Japan, what is the opportunity cost of producing a car? What is the opportunity cost of producing a ton of grain? Show your work.

d) If free trade is allowed, which country will import cars? Which country will import grain? Briefly explain.

Answer 1

(a)

A country tends to have absolute advantage in production of that good which it can produce in greater quantity compared to other country using the same quantity of inputs.

A worker in US can produce 5 cars per year whereas a worker in Japan can produce 15 cars per year.

Japanese worker can produce more number of cars per year compared to US worker.

Thus,

Japan has the absolute advantage in producing cars.

A worker in US can produce 10 tons of grain per year whereas a worker in Japan can produce 5 tons of grain per year.

American worker can produce more quantity of grain per year compared to Japanese worker.

Thus,

United States has the absolute advantage in producing grains.

(b)

A worker in US can produce 5 cars per year or 10 tons of grain per year.

Opportunity cost of producing car = Tons of grain produced in year by a worker/Number of cars produced by a worker = 10/5 = 2 tons of grain

Thus,

In United States, the opportunity cost of producing a car is 2 tons of grain.

Opportunity cost of producing grain = Number of cars produced in year by a worker/tons of grains produced by a worker = 5/10 = 1/2 cars

Thus,

In United States, the opportunity cost of producing a ton of grain is 1/2 cars.

(c)

A worker in Japan can produce 15 cars per year or 5 tons of grain per year.

Opportunity cost of producing car = Tons of grain produced in year by a worker/Number of cars produced by a worker = 5/15 = 1/3 tons of grain

Thus,

In Japan, the opportunity cost of producing a car is 1/3 tons of grain.

Opportunity cost of producing grain = Number of cars produced in year by a worker/tons of grains produced by a worker = 15/5 = 3 cars

Thus,

In Japan, the opportunity cost of producing a ton of grain is 3 cars.

(d)

If free trade is allowed then a country imports that good which it can produce at higher opportunity cost relative to other country.

United States produces car at greater opportunity cost relative to Japan.

Thus,

United States woud import cars.

Japan produces grain at greater opportunity cost relative to United States.

Thus,

Japan would import grain.