Question

Given below is a hypothetical example of trading position of USA and Canada. Assume labor is the only input and barter is the kind of trade in this example. That means a refrigerator is exchanged for a computer directly or computer for a refrigerator. How many refrigerators exchange for one computer or vice versa is what you are going to figure out.

  Alternative Output from One Year of Labor Input

	USA	Canada
Refrigerator	200	40
Computer	200	160

1.What is the opportunity cost of refrigerator in terms of computers in USA and in Canada?

2. Who got a bigger PPF? (Canada or USA)

3. What is the domestic price of a refrigerator in terms of computers in USA? In Canada?

4. Who has absolute advantage? In which product (s)?

5. Who has comparative advantage? In which product?

6. In which product should Canada specialize? How about USA?

Answer 1

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Solution 1

Opportunity Cost refers to cost in which additional gain in the 1 good due to loss in the other good with fully utilization of resources.

In the USA

200 refrigerator equal to 200 computer

1 refrigerator = 200/200 computer

1 refrigerator = 1 computer

In Canada,

40 refrigerator equal to 160 Computer

1 refrigerator = 160/40 computer

1 refrigerator = 4 computer

Solution 2,

When both countries utilize their full resources.

The USA produces more goods than Canada. so, the USA got bigger PPF.

Solution 3

the domestic price good in terms of other goods is the ratio of the total output produced by utilizing the complete resources.

In USA,

200 refrigerator /200 computer

so, 1 refrigerator equal to 1 computer

In Canada,

40 refrigerator / 160 computer

so, 1 refrigerator equal to 4 computer

Solution 4,

if the USA use its complete resources it can produce 200 refrigerators or 200 computer and on the other hand, Canada produces 40 refrigerators and 160 computer.

The USA has an absolute advantage in both refrigerator and computer because it can produce more than Canada.

Solution 5,

Opportunity cost

in the USA

200 refrigerator equal to 200 computer

1 refrigerator = 200/200 computer

1 refrigerator = 1 computer

200 computer equal to 200 refrigerator

1 computer = 200/200 refrigerator

1 computer = 1 refrigerator

In Canada,

40 refrigerator equal to 160 Computer

1 refrigerator = 160/40 computer

1 refrigerator = 4 computer

160 Computer equal to 40 refrigerator

1 computer = 40/160 refrigerator

1 Computer = 1/4 refrigerator

Opportunity Cost

	Refregirator	Computer
Canada	160/40 = 4	40/160 = 1/4
USA	200/200 = 1	200/200=1

The USA has a Comparative advantage in the refrigerator and Canada in Computer because the USA produces 1 refrigerator with a cost of 1 computer which is less costly than Canada where 1 refrigerator cost 4 computers and Canada produce 1 computer with a cost of 1/4 of the refrigerator which is less costly than the USA where 1 refrigerator cost 1 computer.

Solution 6,

Since,

The USA has a comparative advantage in Refrigerator USAneed to be specialize in Refrigerator and

Canada has a comparative advantage in computers, it will be Specialize in Computer.