The china can produce 12 cases of iphones or 8 calculators. India can make 6 cases...

The china can produce 12 cases of iphones or 8 calculators. India can make 6 cases of iphones or 12 calculators with each unit of production. Each country dedicates a total of 1000 units of production for iphones and calculators. Country iphone calculators China 12 8 India 6 12 Q.1) What will be trade ratio of iphones and calculators for both countries to be succesful ? Q.2) Based on above information if trading ratio is 1 who gains from trade ? Please with full details

Solutions

Expert Solution

For Cases of Iphones:

For china, opportunity cost of cases of iphones = 8/12 =0.66 calculators

For India, opportunity cost of cases of iphones = 12/6 =2 calculators

Hence India has a higher opportunity cost for cases of iphones

For Calculator:

For china, opportunity cost of Calculator = 12/8 =1.5 cases of iphones

For India, opportunity cost of calculator = 6/12 =0.5 cases of iphones

Hence China has a higher opportunity cost for calculator

Thus India has a comparative advantage in Calculators and China has a Comparative advantage in Cases of iphones.

Hence India will trade calculators and china will trade cases of iphones.

In 1000 units India will produce 12*1000=12000 calculators

In 1000 units China will produce 12*1000=12000 cases of iphones

Hence Trade Ratio =12000/12000=1

Without trade India could have produced 6*1000 =6000 cases of iphones. Hence Gain from trade is 12000-6000=6000 cases of iphones

Without trade China could have produced 8*1000 =8000 calculator. Hence Gain from trade is 12000-8000=4000 calculators.

Hence India's gain from trade is higher.

Rahul Sunny answered 1 year ago

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