3. Use the following information to answer this question. This example is based

Question

3. Use the following information to answer this question. This example is based on the lecture regarding mutually beneficial trade. One person-day of labor produces Rice (bushels) Computers Country China India Does any country have an absolute advantage? If so, which one? For India, what is the resource (or opportunity) cost of rice (R) in terms of computers (C), and C in terms of R? For China, what is the resource (or opportunity) cost of R in terms of C. and C in terms of R? a) b) c) d) Which country has a comparative advantage in what product e) Under what terms of trade will mutually beneticial trade oecur?

Explanation / Answer

Question 3

(a)

A country is said to have absolute advantage in the production of a good when utilizing the same amount of resources it can produce greater quantity of the good relative to other country.

In given case, utilizing one-person day of labor, China can produce greater quantity of both rice and computer relative to India.

So,

China have an absolute advantage in production of both rice and computers.

(b)

Using one-person day of labor, India can produce either 4 bushels of rice or 2 computers.

So,

The resource cost of rice in terms of computers is (2/4) 0.5 computers.

The resource cost of computer in terms of rice is (4/2) 2 bushels of rice.

(c)

Using one person-day of labor, China can produce either 9 bushels of rice or 3 computers.

So,

The resource cost of rice in terms of computers is (3/9) 0.33 computers.

The resource cost of computer in terms of rice is (9/3) 3 bushels of rice.

(d)

A country is said to have comparative advantage in the production of a good when it can produce that good at lower opportunity cost relative to the other country.

China can produce rice at lower opportunity cost relative to India.

So, China has comparative advantage in the production of rice.

India can produce computer at lower opportunity cost relative to China.

So, India has comparative advantage in the production of computers.

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