Question

For EACH of these tables, do the following, assuming that both countries are initially in autarky. Note: Show ALL of your work!

a. For each good, identify which country has an absolute advantage.

b. For each country, calculate the opportunity cost of producing one more unit of cars.

c. For each good, identify which country has a comparative advantage.

d. EXPLAIN how international economic forces will influence the different businesses in each country when trade is allowed, stating clearly what will happen to production and employment in each industry.

e. Calculate what would happen to production levels in each country and for the two countries combined, if each country’s production of its comparative disadvantage good fell by 10 units and the relevant resources were then transferred to increase production of the country’s comparative advantage good.

	Good (Cars)	Good (Computers)
Country A	10	20
Country B	8	4

Answer 1

a) Country A has an absolute advantage in the production of both cars and computers as it is producing more of each goods than country B.

b) Country A:

OC of producing 1 unit of car = 20/10 = 2 units of computers

Country B:

OC of producing 1 unit of car = 4/8 = 0.5 units of computers

c) As we already know the OC of producing cars from part(b) above,we should find the OC of producing computers

In country A,OC of producing 1 unit of computer = 10/20 = 0.5 units of cars

In country B, OC of producing 1 unit of computer = 8/4 = 2 units of cars

As Country B has less OC in producing car so it has a comparative advantage in producing Cars and as country A has a lower OC in producing computer so it has a comparative advantage in producing Computers.

d) When the countries opens for trade,they would produce only those goods in which it has a comparative advantage in so as to save their scarce resources and specialize in the production of goods they have a lower opportunity cost in producing.These countries would employ its full labor force in the production of this good.They will trade this good in exchange for the good in which they don't have a comparative advantage in.In this way they will be able to consume more of each good and gain from trade.