Question

The tables on the left below shows labor endowments of two countries, Korea and Japan, and their unit labor requirements for producing two goods, kimchi and such Korea Japan Labor 1000 500 Unit labor requirements Kimchi Sushi Draw the PPCs for both Korea and Japan assuming constant opportunity costs. Which country has an absolute advantage in producing kimchi? Sushi? Which country has the comparative advantage in producing kimchi? Sushi? In terms of kimchi, what is the range of prices for sushi for which we could expect trade between Korea and Japan? What is it in terms of sushi?

Answer 1

Unit labor requirement

	Korea	Japan
Kimchi	0.2	1
Sushi	1	0.5

Now calculating total output

	Korea	Japan
Kimchi	2500	1000
Sushi	500	2000

B. From the table we can see korea has absolute advantage in production of Kimchi and Japan has absolute advantage in production of Sushi.

Refer the attached picture for PPC

Korea 600 500 400 Sushi 200 100 0 1000 2000 3000 Kimchi

Japan 2500 2000 1500 Sushi 1000 500 0 1500 500 1000 Kimchi

Now, calculating the opportunity cost.

	Korea	Japan
1 unit of Kimchi	0.2 unit of Sushi	2 unit of Sushi
1 unit of Sushi	5 unit of Kimchi	0.5 unit of Kimchi

Korea has comparative advantage in production of Kimchi and Japan has comparative advantage in production of Sushi. Refer the table above.

Korea will specialize in Kimchi and Japan will specialize in Sushi. If korea produces sushi then it is required to sacrifice 5 units of kimchi. Therefore korea would be ready to trade for sushi when the number of kimchi is less than 5 units. Korea will trade for any term but less than 5 unit of kimchi.

Now when japan produces kimchi then it has to sacrifice 2 units of sushi. Thus, japan would be ready to trade for any amount greater than or equal to 2 units of sushi. Japan specializes in sushi and it has a cost of 0.5 units of kimchi.

Term of trade 2 units of sushi for 5 units of kimchi.

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