Question

Consider the US and China who can both produce soya beans and mobile phones. In a year, the US can produce 80 billion tonnes of soya beans or it can produce 400 million mobile phones. In a year, China can produce 50 billion tonnes of soya beans or it can produce 400 million mobile phones.

1. Explain which country has the absolute advantage in soya beans production and which country has the absolute advantage in mobile phone production?

2. What is the US’ opportunity cost of producing 1 billion tonnes of soya beans? What is China’s opportunity cost of producing 1 billion tonnes of soya beans? Explain which country has the comparative advantage in soya beans production?

3. Explain which country should specialise in soya beans production and which country should specialise in mobile phone production?

d. What is the maximum (in terms of tonnes of soya beans) that the US would be willing to pay for China’s mobile phones? What is the minimum (in terms of tonnes of soya beans) China would accept for its mobile phones? Will they trade and if so, which country benefits from the trade?

Answer 1

	Soya (S)	phones(P)
US	80	400
China	50	400

A)since with the available resources, US can produce more of soya, so US has absolute advantage in Soya

Both nation have same productivity in phone, so no nation has absolute advantage in phone

B) in US, to produce 80 S , give up 400 P

Now to produce 1S, give up 400/80 = 5 P

So opportunity cost of producing 1S ( billion ) = 5 P ( million )

in China, to produce 50 S , give up 400 P

so opportunity cost of producing 1 S (billion) is 400/50 = 8 P ( million)

so US has comparative advantage in Production of Soya

c) nation who had comparative advantage in the good will produce that good ,so

US will specialize in Soya

& China will specialize in Phones

D) now for 1 phone, the maximum US will be willing to pay is

= 80/400 = .2 billion tonnes soya

The minimum. , China will accept = 50/400 = .125 billion soya

So as minimum acceptance price is higher than maximum payment price, so trade will occur.

so both nation will benefit from trade, US will get the good at relatively lower price & china will get more, as compared to autarky