COMPARATIVE ADVANTAGE AND TRADE (20 points) Assume that Brazil and Argentina can

Question

COMPARATIVE ADVANTAGE AND TRADE (20 points) Assume that Brazil and Argentina can produce two goods, beef and corn. The following table shows different combinations of the two goods that each country can produce. BRAZIL ARGENTINA BEEF CORN BEEF CORN 15 1. Who has the comparative advantage in producing beef? Show work. 2. Who has the comparative advantage in producing corn? Show work. 3. Assume that Brazil l is currently producing and consuming 1 beef and 6 corn and Argentina is producing and consuming 3 beef and 6 corn. Can these countrics be made better off by specializing and trading with one another? Explain and show work. If these countries can benefit by specialization and trade, show terms of trade that would benefit both countries. 4. : 2

Explanation / Answer

1) Opportunity Cost of producing beef in Brazil = (6-8)/(1-0) = 2 units of corn
Opportunity Cost of producing beef in Argentina = (12-15)/(1-0) = 3 units of corn
Since opportunity cost of producing beef is lower in Brazil, Brazil has comparitive advantage in the production of beef.

2) Opportunity Cost of producing corn in Brazil = (0-1)/(8-6) = 1/2 unit beef
Opportunity Cost of producing corn in Argentina = (0-1)/(15-12) = 1/3 unit beef
Since opportunity cost of producing corn is lower in Argentina, Argentina has comparitive advantage in the production of corn.

3) Without specialisation, total beef = 1 + 3 = 4beef
Without specialisation, total corn = 6 + 6 = 12 corn
With specialisation, Brazil produces 4 units of beef and Argentina produces 15 units of corn. Hence, total output increases.

4) At present, opportunity cost of production of beef is 2 corn for Brazil and 3 corn for Argentina. Hence, any terms of trade in between this would benefit both countries. For example, 1 beef for 2.5 corn would benefit both countries.

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