Question

3. The U.S. can produce either 100 tons of rice or 50 tons of steel (or some combination in between) per day. Japan can produce either 40 tons of rice or 40 tons of steel (or some combination in between) per day a. The U.S. has an absolute advantage at producing which product(s)? b. The U.S. has a comparative advantage at producing which product(s)? c. Japan has an absolute advantage at producing which product(s)? d. Japan has a comparative advantage at producing which product(s)? e. For each country to be better off the U.S. should produce only, and then they should trade for what they don't and Japan should produce only produce. Why?

Answer 1

Absolute advantage: The absolute advantage for the country means that the goods and service produces would be higher than the other country with the same resources at the given period. Comparative advantage: Comparative advantage is a term in economics that explains the ability of a country to produce an output or production of goods and services in an economy at a minimum opportunity cost compared to the business partners and realize better profits or sale margins Opportunity cost: The opportunity cost can be calculated as follows: Opportunity cost - Loss in commodity y Gain in commodityx

Table -1 shows the production possibility of country US and Japan as follows: Table-1 RiceSteeel се 100 40 US Japan 50 40 Using Equation -1, the opportunity cost of rice in US can be calculated as follows: 50 100 -0.5 Opportunity cost =- Therefore, opportunity cost production of 1 unit of steel is 0.5 unit of rice.

Table -2 shows the opportunity cost for country US and Japan as follows: Table -2 RiceSteeel 0.5 US Japan a. According to the absolute advantage theory, country US produce more rice than steel. Therefore. the US has absolute advantage in production of rice. b. According to the comparative advantage theory, US has less opportunity cost in production of good rice, which is evident from table -2. Therefore, country the US has comparative

ç. In case of country Japan, which produce each goods at the same level of output. According to the absolute advantage theory, there is possibility in absolute advantage for all goods produced in a nation.Therefore, Japan has absolute advantage in production of steel and rice If country engaged in a trade, it trade the goods which has comparative advantages. Since, country the US has trade rice because it has less opportunity cost in production in US, so of steel