Question

Suppose America is able to produce up to 100,000 computers/year or 50,000 TVs/year or any linear combination of the two. Japan is able to produce up to 80,000 computers/year or 160,000 TVs/year or any linear combination of the two. Assume that without trade, each country spends half of their efforts on each good.

Which country has the absolute advantage in each good?

	A.	America has the absolute advantage in both computers and TVs.
	B.	Japan has the absolute advantage in both computers and TVs.
	C.	Japan has the absolute advantage in computers; America has the absolute advantage in TVs.
	D.	America has the absolute advantage in computers; Japan has the absolute advantage in TVs.

Which country has the comparative advantage in each good?

	A.	Japan has the comparative advantage in computers; America has the comparative advantage in TVs.
	B.	Japan has the comparative advantage in both computers and TVs.
	C.	America has the comparative advantage in computers; Japan has the comparative advantage in TVs.
	D.	America has the comparative advantage in both computers and TVs.

Suppose that each country specialized in producing one good and then agreed to trade 45,000 computers for 60,000 TVs. What would the gains from trade be for America?

	A.	35,000 TVs
	B.	5,000 computers and 35,000 TVs
	C.	10,000 computers and 30,000 TVs
	D.	5,000 computers and 60,000 TVs

Continuing with the supposition from #33, what would the gains from trade be for Japan?

	A.	5,000 computers
	B.	5,000 computers and 10,000 TVs
	C.	5,000 computers and 20,000 TVs
	D.	45,000 computers and 20,000 TVs

Answer 1

Since America can produce more of Computers with all their resources (100,000 against 80,000 for Japan) and Japan can produce more of TV's Hence, option D is correct (America has absolute advantage in computer and Japabn in TV)

Opportunity cost for computer in America is 50000/100000=0.5TV and for Japan 160000/80000=2TV and for TV Opportunity cost in America is 100000/50000=2 computer and in Japan=80000/160000=0.5Computer since, America has lower Opportunity cost for producing computer and Japan for TV. Japan has comparative advantage in producing TV whereas America in Computer Hence, Option c. Is correct

America will specialize in computers and will produce 100000 computer and agree to trade 45000 computer for 60000 TV America will left with(100000-45000)=55000 computers and 60000 TV prior Consumption for America was 1/2*100000=50000 computers and 1/2*50000=25,000 TV Hence gain of 55000-50000=5000 computers and 60000-25000=35000 TV. Hence, Option B is correct

Japan will produce 160000 TV post trade will be left with 160000-60000=100000 TV and 45000 computer pre trade Consumption was 0.5*160000=80000TV and 0.5*80000=40000 computers hence gain of (100000-80000)=20000 TV and 45000-40000=5000 computer Hence, option C is correct