Question

Use the following information for the next 17 questions on this practice quiz: Assume that it takes South Africa 400 units of labor to produce a ton of steel and 1600 units of labor to produce a carat of diamonds. Assume it takes India 500 units of labor to produce a ton of steel and 2500 units of labor to produce a carat of diamonds. Assume that each country has 24,000 units of labor and before trade, each country splits their labor evenly between steel and diamond production. Assume that when the countries decide to trade, the country specializing in steel production specializes in steel production only Assume that when the countries decide to trade, the country that specializes in diamond production uses 4000 units of labor for steel production and the rest (20,000 units of labor) for diamond production. Assume that when the countries trade, there are a total of 5 carats of diamonds traded at a rate of 4.6 tons of steel per carat of diamonds.

After trade, how many tons of steel does South Africa consume?

After trade, how many carats of diamonds does South Africa consume?

After trade, how many tons of steel does India consume?

After trade, how many carats of diamonds does India consume?

Answer 1

Amount of steel South Africa can produce if it uses all its labour in the production of steel= 24000/400=60 tons

Amount of diamond South Africa can produce if it uses all its labour in the production of diamond =24000/1600=15 carats of diamond

Opportunity cost of producing a ton of steel for South Africa = 15/60 = 0.25 carat diamond

Amount of steel India can produce if it uses all its labour in the production of steel= 24000/500=48 tons

Amount of diamond India can  produce if it uses all its labour in the production of diamond =24000/2500=9.6 carats of diamond

Opportunity cost of producing a ton of steel for India = 9.6/48 = 0.2 carat diamond.

So as the opportunity cost of producing a turn off steam is less for India, India will produce steel as it has an comparative advantage in the production of steel and South Africa will produce diamonds.

Now, India will only produce steel, so it will be able to produce 48 tons of steel.

And South Africa uses 4000 labour for the production of steel , so with these 4000 labour, South Africa will produce 4000/400 = 10 tons of steel and with the remaining 20000 labour, it will produce 20000/1600 = 12.5 carats of diamond.

Now, we know that 5 carats of diamond is traded and 4.6 tons of steel is required for every diamond.

So, we know South Africa will export diamonds and import steel. So after trade South Africa has. 10+(5*4.6) = 33 tons of steel and (12.5-5) = 7.5 carats of diamond to consume after trade.

After trade India consumes 48-(5*4.6) = 25 tons of steel and 5 carats of diamond.