Suppose you have the following information on the marginal physical product of l

Question

Suppose you have the following information on the marginal physical product of labor in rice production and apparel production in Japan and Thailand: Marginal Physical Product of Labor Rice (bushels per hour) Apparel (units per hour) Japan 20 8 Thailand 12 6 Complete the following table by computing opportunity costs of each good in terms of units of another good for both countries: Japan Thailand Opportunity cost of rice (units of apparel per bushel) Opportunity cost of apparel (bushels of rice per unit) The information given suggests that Japan has an absolute advantage in the production of that Thailand has an absolute advantage in the production of and The information given suggests that Japan has a comparative advantage in the production of and Thailand has a comparative advantage in the production of

Explanation / Answer

(a) Opportunity cost (OC)

(b) Japan has absolute advantage in Rice (since 20 > 12) and Thailand has absolute advantage in no good (12 < 20 and 6 < 8).

(c) Japan has comparative advantage in rice (Japan has lower OC of rice than Thailand: 0.4 < 0.5) and Thailand has comparative advantage in apparel (Thailand has lower OC in apparel than Japan: 2 < 2.5).

(d) Terms of trade (TOT) lies between OC in the two countries.

TOT must be between 0.40 to 0.50 units of apparel per bushel of rice.

Japan Thailand Rice 8 / 20 = 0.40 6 / 12 = 0.50 Apparel 20 / 8 = 2.5 12 / 6 = 2

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