Using the data provided in the table below, please draw the production possibili

Question

Using the data provided in the table below, please draw the production possibilities schedules for each country. Assume constant returns. Please answer all of the following questions: Which country has the absolute advantage in Steel? In VCRs? Which country has the comparative advantage in Steel? In VCRs? What is the opportunity cost of one VCR in Japan? In South Korea? With international trade, what would be the maximum amount of Steel that South Korea would be willing to export to Japan in exchange for each VCR? With international trade, what would be the maximum number of VCRs that Japan would be willing to export to South Korea in exchange for each ton of steel? Explain why constant returns might not hold up in the real world?

Explanation / Answer

2) The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than another party producing the same product or service.

In the production of Steel, South Korea has the absolute advantage as it can produce 60 tons of steel in an hour whereas Japan can produce only 20.

South Korea also has an absolute advantage in VCR production as it can produce 40 VCRs in an hour whereas Japan can produce only 20 of them.

3 & 4) The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals.
Opportunity Costs for South Korea

VCR = 80/40 = 2

Steel = 40/80 = 0.5

Opportunity Costs for Japan

VCR = 20/20 = 1

Steel = 20/20 = 1

Therefore, since the opportunity cost Steel is lower for South Korea, it will have a comparative advantage in Steel production.

Whereas, Japan has a comparative advantage in the production of VCRs.

5 & 6) Trade gains could arise if countries first specialize in their comparative advantage good and then trade with the other country. Specialization would mean that South Korea produces only Steel and no VCRs, while Japan produces only VCRs and no Steel.

Since South Korea produces only Steel, it will trade Steel with Japan for VCRs. The maximum Steel it would be looking to export to Japan in exchange for a VCR would be less than its own opportunity cost of production, i.e. less than 2. Therefore, it would be willing to exchange 1 VCR for 1 Steel.

Since Japan produces only VCRx, it will trade VCRs with South Korea for Steel. The maximum VCRs it would be looking to export to South Korea in exchange for Steel would be less than its own opportunity cost of production, i.e. less than 1.

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