Question

Question 1: Germany and India only produce two goods. They have the same fixed resources, are equally efficient, and both countries have constant opportunity costs between two the goods. In one month, Germany can produce 200,000 automobiles or 60,000 hand-held computers. India can produce 150,000 automobiles or 50,000 hand-held computers.

A. Graph the given information.

B. What is the opportunity cost for Germany to produce automobiles?

C. What is the opportunity cost for India to produce automobiles?

D. What is the opportunity cost for Germany to produce hand-held computers?

F. Which nation has the absolute advantage in Automobiles, Which has the absolute advantage in hand-held computers?

G. Which nation has the comparative advantage in automobiles, which has the comparative advantage in hand-held computers?

H. Can these nations benefit from trade? Explain how. Be detailed , use numbers and prove your answer.

Answer 1

	Automobiles	Computers
Germany	200,000	60,000
India	150,000	50,000

Calculation of opportunity cost

Opportunity Cost

	Germany	India
1 Automobile	0.3 computers	0.33 Computers
1 computer	3.33 Automobiles	3 Automobiles

A. Refer the attached picture below for Germany PPF

Refer below for the PPF of India

B. Opportunity Cost of Germany to produce automobile = 0.3 Hand held computers

C. Opportunity Cost of India to produce automobile = 0.33 Hand held computers

D. Opportunity Cost of Germany to produce hand held computers = 3.33 automobiles

E. Opportunity Cost of India to produce hand held computers = 3 automobiles.

F. Germany has absolute advantage in producing both Automobiles and Hand held computers.

G. Germany has comparative advantage in producing automobiles.

India has comparative advantage in producing Hand held computers.

H. Let us assume before specialization both countries were devoting half of their resources on production of these two commodities. Thus produce was

	Automobile	Computers
Germamy	100,000	30,000
India	75,000	25,000
Total	175,000	55,000

After specialisation Germany will be producing only automobiles while India will be producing only computers

Total produce

	Automobile	Computers
Germany	200,000	0
India	0	50,000
Total produce	200,000	50,000

Let us consider they agree to exchange 1 computer with 3 automobiles.

Germany requires 30,000 computers then

After Specialization

	Automobile	Computers
Germany	110,000	30,000
India	90,000	20,000

As we can see from above both countries will get better off after trade.

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