Suppose Australia and New Zealand each have 100 acres of land available for farm
ID: 1122847 • Letter: S
Question
Suppose Australia and New Zealand each have 100 acres of land available for farming wheat and cotton. Yields per acre are listed in the following table.
a) Which country has comparative advantage in wheat production?
b) Which country has comparative advantage in cotton production?
c) Explain how trade between the two countries can enable both to consume levels of cotton and wheat outside their respective production capabilities.
New Zealand Australian Wheat 6 Bushels 2 Bushels Cotton 2 Bales 6 BalesExplanation / Answer
To find comparative advantage first find opportunity cost of each good in each country.
New zealand. Australia
Wheat. 2/6=0.33. 6/2=3
Cotton. 6/2=3. 2/6=0.33
a & b) New Zealand has lower opportunity cost of producing wheat than Australia. Australia has lower opportunity cost of producing cotton than New Zealand. So New Zealand has comparative advantage in wheat and Australia has comparative advantage in cotton.
c) suppose half of the land, 50 acres are used for wheat and other hanf for cotton. Production of wheat in New Zealand is 6*50=300 and of cotton is 2*50=100
Production of wheat in Australia is 50*2=100 and of cotton is 50*6= 300
Now if both countries trade and specialise. New Zealand produces only wheat Australia products cotton only. So total wheat production is 6*100= 600 and total cotton production is 100*6= 600.
Total cotton is more in trade.
Thus trade enables both to consume levels of cotton and wheat outside their respective production capabilities.
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