The comparative advantage of countries.
Answer to Problem 2P
a. New Zealand- The cost of producing 1 Apple is 0.25 plums and the cost of producing 1 plum is 4 Apples.
Spain- The cost of producing 1 Apple is 1 plum and the cost of producing 1 plum is 1 Apple.
b. New Zealand should produce apples and Spain should produce plums.
c. Graph
d. The total gain of Apples is 20 and the total gain of plums is 10.
Explanation of Solution
The comparative advantage is the advantage that the country has over the competitor in the
Option (a):
In New Zealand, the production of 20 apples needs the resources which can alternatively be used for the production of 5 plums. Thus, the opportunity cost of producing 1 apple can be calculated by dividing the total units of plums given up by the total units of apples gained as follows:
Thus, the opportunity cost of producing 1 apple in New Zealand is 0.25 plum.
The opportunity cost of producing plum in New Zealand can be calculated by dividing the number of units of apples given up with the number of units of plums gained as follows:
So, the opportunity cost of producing 1 plum in New Zealand is 4 apples.
In Spain, the production of 20 apples needs the resources which can alternatively be used for the production of 20 plums. Thus, the opportunity cost of producing 1 apple can be calculated by dividing the total units of plums given up by the total units of apples gained as follows:
Thus, the opportunity cost of producing 1 apple in Spain is 1 plum.
The opportunity cost of producing plum in Spain can be calculated by dividing the number of units of apples given up with the number of units of plums gained as follows:
So, the opportunity cost of producing 1 plum in Spain is 1 apple.
Option (b):
The opportunity cost of producing a unit of apple is lower in New Zealand (0.25 Plum) compared to Spain (1 Plum). Thus, New Zealand should specialize in the production of apples.
The opportunity cost of producing a unit of plum is lower in Spain (1 Apple) compared to that in New Zealand (4 Apples). Thus, Spain should specialize in the production of plums.
Option (c):
Before the trade, the
According to the terms of trade of
Similarly, Spain can have 2 apples for 1 plum in the international trade which will increase their total possible consumption of apples from 60 million bushels to 120 million bushels. Thus, the vertical intercept of the Spain's production possibility curve will increase to 120 million bushels. So, the slope of the production possibility curve of Spain will decrease from -1 to -0.5.
The changes are shown in the diagram as follows:
Option (d):
The mixed product of New Zealand is B and of Spain is S. According to the table, the total output of apples in New Zealand at this mixed product is 20 million bushels and the output of plums is 10 million bushels. Similarly, at the given output combination S of Spain, the total output of apples is 20 million bushes and of plums is 40 million bushels.
Thus, the total output of the apple and plum before the trade can be calculated by adding the individual quantities of apples that are produced in New Zealand and Spain together are as follows:
Thus, the total output of apples before the trade was 40 million bushels.
Similarly, the total output of plums can be calculated by adding together each country’s outputs are as follows:
Thus, the total output of plums before the trade was 50 million bushels.
After the specialization by New Zealand in the production of apples, the total output of apples increased to 60 million bushels. Similarly, the specialization by Spain in the production of plums increased the total output of plums to 60 million bushels. Thus, total
Thus, the total output gain of apples is 20 million bushels.
Similarly, the total output gain in the case of plums can be calculated as follows:
Thus, the total output gain in plums is 10 million bushels.
Concept introduction:
Comparative advantage: It is the ability of the producer, firm or a country to produce a good or service at the lowest opportunity cost of production than the competitors.
Specialization: It is the process of identifying the product in which, the country has the comparative advantage in the form of lower opportunity cost of production. Thus, they can focus on the production of that commodity which will increase the output and they can engage in an international exchange in order to obtain the products in which they don’t have any comparative advantage.
Want to see more full solutions like this?
Chapter 20 Solutions
MACROECONOMICS W/CONNECT
- Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of coal and 1 hour of labor to produce a bushel of wheat. Suppose that Poland has 1,000 hours of labor and that it completely specializes according to its comparative advantage. How many units of which product will it produce? 250 tons of coal 1,000 bushels of wheat O100 bushels of wheat 4,000 tons of coal One of the main reasons for China to actively invest in foreign companies is to enhance the competitiveness of Chinese firms globally. take advantage of low wages in foreign countries. Omake best use of its technological expertise in the world market. meet the growing demand of the high population in China.arrow_forward5. Suppose that the comparative-cost ratios of two products- baby formula and tuna fish-are as follows in the hypotheti- cal nations of Canswicki and Tunata: Canswicki: 1 can baby formula = 2 cans tuna fish 1 can baby formula = 4 cans tuna fish Tunata: In what product should each nation specialize? Explain why terms of trade of 1 can baby formula = would be acceptable to both nations. 25 cans tuna fisharrow_forwardAnswer the question on the basis of the following production possibilities tables for two countries, Latalia and Trombonia Latalia's Production Possibilities с 2 10 Pork (Tons) Beans (Tons) Pork (Tons) Beans (Tons) A 4 0 3 5 8 0 1 15 Trombonia's Production Possibilities с 4 12 D 0 20 2 18 E O 24 Refer to the tables. If these two nations specialize on the basis of comparative advantage: Trombonia will produce beans and Latalia will produce pork. Trombonia will produce both beans and pork Latalia will produce both beans and pork and Trombonia will produce neither. Latalia will produce beans and Trombonia will produce pork.arrow_forward
- 25 20 15 10 LO 0 P a 0 O 3 (d) areas (b) + (c) + (d) + (e) (e) areas (a) + (b) + (c) + (d) e 6 b O S 9 12 15 18 25. If the free trade price is IP and this country imposes a trade tariff of $6, the loss to the economy as a result of this tariff is represented by O(a) area (a) in this graph (b) area (b) in this graph (c) areas (c) + (d) P* 21 IP D 24 Qarrow_forwardAssume that England and Spain can switch between producing cheese and producing bread at a constant rate. Labor Hours Needed Number of Units to Make 1 Unit of Produced in 40 Hours Cheese Bread Cheese Bread England 1 40 10 Spain 10 England has a comparative advantage in the production of O a. cheese and Spain has a comparative advantage in the production of bread. Ob. neither good and Spain has a comparative advantage in the production of both goods. Oc. both goods and Spain has a comparative advantage in the production of neither good. O d. bread and Spain has a comparative advantage in the production of cheese.arrow_forwardFor each hour worked, a U.S. worker can produce 4 dozen baguettes, or 2 tonnes of aluminum. Canadian workers can produce 2 dozen baguettes, or 1 tonne of aluminum per hour. The information indicates that O A. Canada has comparative advantage in aluminum, and the U.S. has comparative advantage in baguettes. OB. neither country has comparative advantage in aluminum or baguettes. O C. Canada has comparative advantage in baguettes, and the U.S. has comparative advantage in aluminum. O D. the U.S. has comparative advantage in both alyminum and baguettes.arrow_forward
- The fictional country of Anastialia is a small country with rich resources in minerals. In a day it can produce 100 pounds of silver or 50 pounds of copper. Another country, West Burma, can produce 25 pounds of silver or 5 pounds of copper in a day. From this data, which country has the comparative advantage in copper production by producing it at a lower opportunity cost? O Neither country has a comparative advantage. O Anastialia O West Burmaarrow_forwardPrice (dollars per shirt) 44 40 36 32 28 24 20 16 12 O 8 O 32 million The figure shows the market for shirts in the United States, where D is the domestic demand curve and S is the domestic supply curve. The world price is $20 per shirt. The United States imposes a tariff on imported shirts, $4 per shirt. 24 million S In the figure above, with the tariff the United States imports 8 million D O 16 million 16 24 32 40 48 56 64 Quantity (millions of shirts per year) million shirts per year.arrow_forwardAssume that the comparative-cost ratios of two products— baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula ≡ 2 cans tuna fish Tunata: 1 can baby formula ≡ 4 cans tuna fishIn what product should each nation specialize? Which of the following terms of trade would be acceptable to both nations: (a) 1 can baby formula ≡ 2 1 2 cans tuna fish; (b) 1 can baby formula ≡ 1 can tuna fish; (c) 1 can baby formula ≡ 5 cans tuna fish?arrow_forward
- Canada exports canola oil to Japan. Therefore, Japan must have the comparative advantage in the production of canola oil, and its autarkic price is higher than the free trade price. O Japan must have the comparative advantage in the production of canola oil, and its autarkic price is lower than the free trade price. Canada must have the comparative advantage in the production of canola oil, and its autarkic price is higher than the free trade price. Canada must have the comparative advantage in the production of canola oil, and its autarkic price is lower than the free trade price.arrow_forwardSuppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries? How would rising costs (rather than constant costs) affect the extent of specialization and trade between these two countries?arrow_forwardCorn 60 60 80 O 120 United States 20 60 Peanuts Corn 60 Using the graph above, if Canada has a comparative advantage in corn, how much should they produce when they specialize in the production of corn? 20 Canada Peanutsarrow_forward
- Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc