Question

Question on Latin American Economy:

19. The following table describes the technology available in two different countries for the production of goods in two different sectors. Product A Product B 10 units per day Country A 2 unit per day Country B 5 units per day 15 units per day For the following relative prices, determine if country A and country B would have incentives to either import or export good B. а. Relative price: X units of product A for 1 unit of product B X 6 X 1 X=4 Country A Country B b. If country A represents the countries in Latin America and country B represents the countries in Europe, which sectors of the economy would be good representations of the actual World? Product A Product B

Answer 1

Deppontorartit Opportunity cost I Product A Product B Country A Country B Relative price: Xunits of A praunit A A x = 6 T X =4 1x =1 Export I nerast Import Import at 1 Export Import I Country A Country B скорт Ехүът

Opportunity cost of product A can be found out by diving the maximum no. of product B produced by the number of the Product A produced.

This is as to find out how much of product B the country has to give up to produce 1 unit of product A .

Eg as in the table
Country A produces either 2 units of Prouct A or 10 units of Prouct B .
If it wants to find out oppotunity cost of producing product A , it will divide Product b by product A
Hence we see 10/2 = 5 units
To produce 1 extra unit of Product A, country A has to give up on 5 units of product B .

a)
We match the opportunity cost of product A of both countries with the relative price. If Opportunity of cost is greater to relative price for that country then that country will export and if it is less then country will import.

b) Product A : Coffee

Product B : Machinery