Question

5. The economies of New Zealand and Australia produce only wheat and cotton. Each country has land area of 100 acres. The following table gives the production per acre of what and Cotton in each country: New Zealand Australia Wheat Cotton 6 2 2 6 a. Which country has absolute advantage in what commodity? b. Which country has comparative advantage in what commodity? c. Sketch the Production possibility curve for both countries (draw the PPC) for a month. Does it imply increasing, decreasing or constant opportunity cost? d. If country specializes in production, which country will export what? MacBook Air 80 000 DOO F3 F3 F6 FR F10 A * # 3 $ 4 % 5 & 7 6 a 0 E R. T T Y С - 0 P D F Н. J к L < C V В. N. M

Answer 1

a) New Zealand has absolute advantage in wheat because it could produce more wheat than Australia Australia has absolute advantage in Cotton. o is calculated by Comparative ade advantage finding out opportunity cost. Lesser opportunity Cost means comparative advantage. opportunity Cost of wheat in flew Zealand- 2 0.33 Cotton 6 opportunity Cost of wheat in Australia - a - 3 Cotton. so New Zealand has lesser opportunity Cast Porn cheat which means It has comparative advantage in wheat. In same way, Australia have comparative Cotton advantage in

New Zealand y Australia 4 G 6 5 5 ut wheart 3 37 2 PPE PPR- + + 4 3 2. - 6 Cotton Cotton It shows Constant opportunity Cost because Slope of PPF is same or PPr. is straight line. زه Country should specialize according to Comparative advantage. - New Zealand should specialize in wheat and Export wheat because it have comparative advantage in wheat. In same way, Australia should specialize in Cotton and Export Cotton.
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