Question

Consider two countries, Caledonia and Scotia. If Caledonia puts all its resources in production of meat, they can produce 100 tons of meat; if puts all its resources in production of milk, they can produce 40 tons of milk; the opportunity cost of producing meat (in terms of forsaken milk) is constant. If Scotia puts all its resources in production of meat, they can produce 40 tons of meat; if puts all its resources in production of milk, they can produce 100 tons of milk; the opportunity cost of producing meat (in terms of forsaken milk) is constant.

1. Are the Caledonians and/or Scotians better off in an autarky or in an open economy? Explain how you know. please type it. not handwriting.

Answer 1

Ans: Given in the question, If Caledonia puts all its resources in the production of meat, they can produce 100 tons of meat and if it puts all its resources in the production of milk, they can produce 40 tons of milk. which means that the Caledonia has a comparative advantage in producing meat.

Similarly, If Scotia puts all its resources in the production of meat, they can produce 40 tons of meat and if puts all its resources in the production of milk, they can produce 100 tons of milk, which means that Scotia has a comparative advantage in the production of milk.

It is important to understand, Specialization plays the role of a catalyst in trade. If both the countries stay in autarky they will have to engage its resources in the production of both commodities with lack of specialization. Whereas if the countries engage in trading, they will produce the commodities in which they have a comparative advantage and import the other commodity. In our case, Caledonia will export meat and import milk (in this way it can use all its resources to produce meat). Similarly, Scotia will export milk and import meat ( in this way it can use all of its resources to produce milk). Open economy gives the country a chance to efficiently produce the good that they have the comparative advantage of. In this way, both labor and good market prosper.