1. Suppose there are two countries Country A and Country B. Country A can produc

Question

1. Suppose there are two countries Country A and Country B. Country A can produce 4,000 cell phones or 10,000 garments a day, or any combination thereof. Country B can produce 6,000 cell phones or 6,000 garments a day, or any combination thereof. For Country A: cell phones The opportunity cost of 1 garment is 4 4000 10000 The opportunity cost of1 cell phone is 100004000 2.5 garments For Country B: The opportunity cost of 1 garment is cell phones 6000 6000 The opportunity cost of1 cell phone is garments 6000 6000 A has a comparative advantage in garments B has a comparative advantage in cell phones For both country to benefit from the trade the terms of trade needs to be 1 cell phone for to garments

Explanation / Answer

For Country A

Opportunity cost of producing 1 garment: 4,000/10,000 = 0.4 cellphones

Opportunity cost of producing 1 cellphone: 10,000/4,000 = 2.5 garments

For Country B

Opportunity cost of producing 1 garment: 6,000/6,000 = 1 cellphone

Opportunity cost of producing one cellphone: =6000/6,000 =1 garment

Country A has a comparative advantage in garments

Country B has a comparative advantage in cell phones

For both country to benefit from the trade the terms of trade needs to be: 1 cell phone for 1 to 2.5 garments.

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