Production and Consumption Without Trade Clocks Ha Denmark Belize 900 150 150 10

Question

Production and Consumption Without Trade Clocks Ha Denmark Belize 900 150 150 100 Denmark and Belize can produce both clocks and hats. The table above shows the production and consumption quantities without trade in the case where each country using all its resources. Suppose the two acountries specialize in the production of the good in which it has a comparative advantage and agree to trade. All of the following are terms of trade that could possibly benefit both countries except O A. 1 hat exchanges for 4 clocks O B. 1 hat exchanges for 5 clocks C. 1 hat exchanges for 8 clocks 0 D. 1 hat exchanges for 2 clocks

Explanation / Answer

Question 1

Using all its resources, Denmark can produce either 900 clocks or 150 hats. The opportunity cost of producing 1 clock is (150/900) 0.17 hats while the opportunity cost of producing 1 hat is (900/150) 6 clocks.

Using all its resources, Belize can produce either 150 clocks or 100 hats. The opportunity cost of producing 1 clock is (100/1500) 0.67 hats while the opportunity cost of producing 1 hat is (150/100) 1.5 clocks.

Denmark can produce clocks at lower opportunity cost relative to Belize and thus has comparative advantage in the production of clocks. On the other hand, Belize can produce hats at lower opportunity cost relative to Denmark and thus has comparative advantage in the production of hats.

Denmar can produce 1 hat by sacrificing 6 clocks so it will be ready for trade when 1 hat is offered for less than 6 clocks otherwise not.

So, if both countries specialize in the production of the good in which they have comparative advantage and trade then ther terms of trade that involve exchange of 1 Hat for less than 6 clocks would be beneficial for each country. Any term of trade that involves exchange of more than 6 clocks for 1 hat would not be beneficial for the countries involved.

Hence, the correct answer is the option (C).

Question 2

Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. While absolute advantage is the ability of an individual, a firm, or a country to produce more of a good or service than competitors when using the same amount of resources.

A country will always be an exporter of a good where it has comparative advantage in production.

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