The table to the right shows the quantities of rice and wheat that two countries

Question

The table to the right shows the quantities of rice and wheat that two countries can produce in a year if they specialize in the production of each good. RiceWheat Which of the following statements is true? Country X 100 tons 320 tons Country Y 250 tons 450 tons A. Country X has an absolute advantage in the production of rice. B. Country X has an absolute advantage in the production of wheat. C. Country Y has a comparative advantage in the production of rice. D. Country Y has a comparative advantage in the production of wheat.

Explanation / Answer

Answers

1) Option C : Company Y has a comparative advantage in the production of rice

Company Y's opportunity cost of producing rice is 450/250= 1.8 Units of wheat , while the Company X's opportunity cost of producing rice is 320/100= 3.2 Units of wheat hence Company Y has a comparative advantage in the production of rice.

2) Option A : 20 billion

Net factor payment = Payment from foriegners - Payment to foriegners

   = 200-180 = 20 billion

3) Japan has the absolute advantage over production of car and America have absolute advantage over production of grain.

Opportunity cost table

Japan has the comparative advantage in the production of cars and United states have the comparative advantage in the production of grain.

United states will Import grain and Japan will import cars

Grain Cars United states          0.44          2.29 Japan          2.50          0.40

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