You must show all of your work where calculations are required and you must incl
ID: 1176591 • Letter: Y
Question
You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit:
Below is a hypothetical production possibilities table for Argentina and India. Each country can produce Beef and Cotton. Assume that before specialization and trade (i.e. if they are each self sufficient), Argentina produces 20 Beef and 40 Cotton and India produces 15 Beef and 180 Cotton:
Production Possibilities Table %u2013 8 hours of production
Argentina India
Beef Cotton Beef Cotton
0 80 0 240
10 60 15 180
20 40 30 120
30 20 45 60
40 0 60 0
Graph the PPF for each of the two countries separately (you do not need to submit the graph for grading) and using the information above, please answer the following:
a. Opportunity-cost ratios: Calculate the opportunity cost ratio for these two goods in Argentina. Calculate the opportunity cost ratio for these two goods in India.
b. Absolute vs. comparative advantage: Which country has an absolute advantage in the production of Beef? Which country has an absolute advantage in the production of Cotton? Which country has a comparative advantage in the production of Beef? Which country has a comparative advantage in the production of Cotton?
Suppose that instead of being self sufficient, these two countries decide to each specialize in the good in which they have the comparative advantage and then trade for the other good. Assume that the country that specializes in Beef trades 17 Beef to the other country (which specializes in Cotton) for 51 Cotton.
c. What are the gains from specialization and trade for Argentina?
d. What are the gains from specialization and trade for India?
HINT: You may wish to construct a table like the one shown in the text to calculate your answers.
Explanation / Answer
A. Opportunity cost in Argentina is 1Beef=2Cotton and 1Beef=4Cotton in India.
B. India has absolute advantage in producing both goods. Look at the table. If they both produce only one good, India can produce 240 units of cotton or 60 units of beef while Argentina can only produce 80 units of cotton or 40 units of beef. Clearly, India has absolute advantage.
In terms of comparative advantage, India has comparative advantage in ONLY producing cotton because to produce 30 units of beef, they have to forego 120 units of cotton while to produce the same amount of beef, Argentina only needs to forego 60 units of cotton, or half of what it takes India to accomplish. For the beef production, Argentina has a clear comparative advantage over India with the same reasoning. For Argentina to produce 60 units of cotton, they have to forego 10 units of beef and for India to produce 60 units of cotton, they have to forego 15 units of beef. Clearly, it is cheaper to produce beef in Argentina as compared to India.
c. With trade. The terms of trade (TOT) is given as 17 beef= 51 cotton.
Lets say they both specialize. Argentina in beef all the way for 40 units and India soely producing cotton alone at 240 units. These just means that all thier resources are focused on making one product only. Now, with trade, Argentina can export 20 units of beef to India in exchange for 60 units of cotton. Now, Argentina can have 20 units of Beef and 60 units of cotton. Clearly this situation is better off for Argentina than before trade where they can only have 20 units of beef and 40 units of cotton. Now, they get to enjoy 20 units extra cotton just by trading!
As for India, now they get to enjoy 20 units of Beef and 180 units of cotton.Before trade ( look at table above), they get to enjoy only 15 units of beef and 18 units of cotton. Now after trade, they get to tnjoy extra 5 units of beef. Got beef???
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