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In: Economics

An American worker can produce either 5 cars or 8 tons of grain a year. A...

An American worker can produce either 5 cars or 8 tons of grain a year. A Japanese worker can produce either 4 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
Japan

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, (neither country/United States/Japan) has an absolute advantage in producing cars, and (neither country/United States/Japan) has an absolute advantage in producing grain.

Also, (neither country/United States/Japan) has a comparative advantage in producing cars, and (neither country/United States/Japan) 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 200 million tons of grain for 100 million cars.

True

False

Solutions

Expert Solution

1) United States:

1 worker can produce 5 cars.

So, 1 car is produced by 1/5th worker

1 worker can produce 8 tons of grain.

So, 1 ton of grain is produced by 1/8th worker.

Japan:

1 worker can produce 4 cars.

So, 1 car is produced by 1/4th worker

1 worker can produce 9 tons of grain.

So, 1 ton of grain is produced by 1/9th worker.

2)

US:

5 cars = 8 tons of grain

1 car = 8/5 = 1.6 tons of grain

1 ton of grain = 5/8 = 0.625 cars

Opportunity cost of 1 car is 1.6 tons of grain and 1 ton of grain is 0.625 cars.

Japan:

4 cars = 9 tons of grain

1 car = 9/4 = 2.25 tons of grain

1 ton of grain = 4/9 = 0.44 cars

Opportunity cost of 1 car is 2.25 tons of grain and 1 ton of grain is 0.44 cars.

3) Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

United States has an absolute advantage in producing cars, and Japan has an absolute advantage in producing grain.

Comparative Advantage

According to this theory, A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

United States has a comparative advantage in producing cars, and Japan has a comparative advantage in producing grain.

True.

If both countries produce goods in which both have their comparative advantage then production of cars = 500 million by US and production of tons of grains = 900 million by Japan.

when 200 million tons of grains are traded fro 100 million cars.

If US trade 200 million cars with Japan then US have 300 million cars and 400 million grains.

and Japan have 200 million cars and 500 million tons of grains.

Rahul Sunny answered 1 year ago
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