Question

QUESTION 38 Zambia and Turkmenistan have the outputs per worker in producing cotton and steel shown in the table below. Unit labour requirements Turkmenistan Zambia 3 cotton 8 steel 2 1 a. By showing relevant calculations, demonstrate who has a comparative advantage in cotton production? b. By showing relevant calculations, demonstrate who has a comparative advantage in steel production? c) According to the Theory of Comparative Advantage, will these countries engage in trading with each other? For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). T E TTT Arial 3 (12pt)

Answer 1

Ans) Comparative advantage is when one country can produce a good with lower opportunity cost than the other. If one country has comparative advantage in producing any good over the other country, they will engage in trade. The one will lower opportunity cost will export the good and one with higher opportunity cost will import the good.

1) Opportunity cost of cotton in Zambia = steel sacrificed ÷ cotton gained = 2÷3 = 0.67

Opportunity cost of cotton in Turkmenistan = steel sacrificed ÷ cotton gained = 1÷8 = 0.125

Since, Turkmenistan has lower opportunity cost of producing cotton, it has comparative advantage in producing cotton.

2) Opportunity cost of steel in Zambia = cotton sacrificed ÷ steel gained = 3÷2 = 1.5

Opportunity cost of steel in Turkmenistan = cotton sacrificed ÷ steel gained = 8÷1 = 8

Since Zambia has less opportunity cost of producing steel, it has comparative advantage in steel.

3) Yes, these countries can engage in trade. Zambia can export steel to Turkmenistan and Turkmenistan can export cotton to Zambia.