answer ALL questions and show ALL questions Use the information in the table to
ID: 1198011 • Letter: A
Question
answer ALL questions and show ALL questions
Use the information in the table to answer the following questions
1.
Indicate which country has comparative advantage in what good and specify a range of terms of trade that would be mutually beneficial to both countries.
2. Show that the world can gain from trade with specialization.
3. Using the above terms of trade, show that each country can gain from trade (consumption gains).
Output per Labor Hour Consumption Before Trade Nation Rice Leather Jacket Rice Leather Jacket Sri Lanka 10 20 60,000 120,000 Bangladesh 12 35 50,000 200,000Explanation / Answer
1. The opportunity cost for producing rice in Sri Lanka is 0.5 while it is 0.34 in Bangladesh. Again, the opportunity cost for producing leather jackets in Sri Lanka is 2 while it is 2.92 in Bangladesh. From this we can see that Sri Lanka has a comparative advantage in the production of leather jackets and Bangladesh has a comparative advantage in producing rice. Their opportunity costs are lower for each of these products relative to one another, and so there is potential for beneficial trade.
Range of terms of trade that would be mutually beneficial to both countries is 0.34 rice = 2 leather jackets
2. When the two countries trade the resulting joint possibilities are larger:
3. Each country can gain from trade in the following way:
200000
Description of the Option's Production Choices Rice Leather jackets Total Product Option #1 Both countries produce maximum of rice 12 0 12 Option #2 Both countries focus on their efficient specialization 12 35 47 Option #3 Both countries produce maximum amount of leather jackets 0 35 35Related Questions
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