Question

6. The following table shows how many hours it would take to produce one meter of cloth or one kilogram of wheat for country A and country B._? Cloth wheat Country A 1 hour/per meter 3 hours/per kg Country B 2 hours / per meter 4 hours/per kg According to the absolute advantage theory, is there a basis for trade between country A and country B? Explain. Which country has the comparative advantage in wheat production? Explain your answer. Now Assume that labor is the only factor of production and country A has 120 million hours of labor. Draw the production possibility frontier of country A assuming a linear PPF curve CS Country A is wondering about two possible combinations of production; 60 million meters of cloth and 20 million kg of wheat OR no cloth, but 40 million kg of wheat. Which combination achieves production efficiency? Explain. CamScanner

Answer 1

I. The productivity of country A in producing both cloth and wheat is higher than that of country B. According to the absolute advantage theory, country A has an absolute advantage in both the goods and hence, there is no basis for trade between country A and country B

II. In Country A:

Production of cloth in 1 hour = 1 meter

Production of wheat in 1 hour = 1/3 kg

Therefore, the opportunity cost of producing a meter of cloth = 1/3 kg = 0.33 kg of wheat

The opportunity cost of producing 1 kg of wheat = 1/0.33 = 3 meters of cloth

Country B:

Production of cloth in 1 hour = 1/2 meter = 0.5 meter

Production of wheat in 1 hour = 1/4 kg = 0.25 kg

Therefore, the opportunity cost of producing a meter of cloth = 0.25/0.5 kg = 0.5 kg of wheat

The opportunity cost of producing 1 kg of wheat = 0.5/0.25 = 2 meters of cloth

From the above analysis, we observe that the opportunity cost of producing cloth is lower for country A while that of producing wheat is lower for country B. Therefore, country A has a comparative advantage in producing cloth and country B has a comparative advantage in producing wheat

III. Number of available labor hours in country A = 120 million hours

If the entire labor is used to produce only cloth, the production of cloth in country A = 120 million/1 = 120 million meters

If the entire labor is used to produce only wheat, the production of wheat in country B = 120 million/3 = 40 million kg

PPF of Country A Production of Wheat (in million kg) 0 20 120 140 40 60 80 100 Production of Cloth (in million meters)

IV. Given production combinations:

60 million meters of cloth and 20 million kg of wheat

0 meters of cloth and 40 million kg of wheat

PPF of Country A 40) (60,20) Production of Wheat (in million kg) 0 20 120 140 40 60 80 100 Production of Cloth (in million meters)

Both the points are on PPF and hence both are achieving production efficiency. Any point of PPF is a production level of 100% efficiency