Suppose Australia and New Zealand each have 100 acres of land available for farm
ID: 1124287 • 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 Australia Wheat 6 bushels 2 bushels Cotton 2 bales 6 balesExplanation / Answer
a) New Zealand's opportunity cost of producing 1 bushel of wheat = 2/6 = 1/3 bales of cotton.
Australia's opportunity cost of producing 1 bushel of wheat = 6/2 = 3 bales of cotton.
The opportunity cost producing wheat is lower for New Zealand. Therefore, New Zealand has a comparative advantage in the production of wheat.
b)
New Zealand's opportunity cost of producing 1 bale of cotton = 6/2 = 3 bushels of wheat.
Australia's opportunity cost of producing 1 bale of cotton = 2/6 = 1/3 bushels of wheat.
The opportunity cost producing cotton is lower for Australia. Therefore, Australia has a comparative advantage in the production of cotton.
c) When the countries produce in accordance with their respective comparative advantage, both countries can produce at a lower opportunity cost. This reduces the cost of production. Also, production in accordance with comparative advantage increases the production level in both the countries. When the countries trade with each other, they can buy goods at a lower cost from the other country as well. So, increase in production and decrease in cost allows both the countries to consume cotton and wheat outside their respective production capabilities.
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