Can someone please explain the process of how you get the answer not just give m
ID: 1157296 • Letter: C
Question
Can someone please explain the process of how you get the answer not just give me the answer. Thank you very much!
New Zealand (NZ) and Australia (AUS) produce food (F) and cloth (C) using labour (L) and capital (K). Labour and capital are currently allocated in the following way between the sectors.
NZ: LF = 250 KF = 300 LC = 100 KC = 50
AUS: LF* = 200 KF* = 190 LC* = 100 KC* = 90
Which of the following is true?
Select one:
a. NZ is both labour-abundant and capital-abundant.
b. NZ is labour-abundant and AUS is capital-abundant.
c. NZ is capital-abundant and AUS is labour-abundant.
d. Not enough of information to tell.
Explanation / Answer
Abundance is always define in the terms of a ratio not in absolute quantities. It means to find the abundance in a country we will use the labour capital or capital labour ratio and compare them to find the result.
In simple words, the country which have high labour- capital ratio is abundant in labour while the country which have higher capital - labour ratio is abundant in capital.
NZ: LF = 250 KF = 300 LC = 100 KC = 50
AUS: LF* = 200 KF* = 190 LC* = 100 KC* = 90
Labour - capital ratio in NZ = L/K = 350/350 = 1
Labour - capital ratio in AUS = L*/K* = 300/280 = 1.0714 = 1.07
we can see that labour capital ratio in AUS is more than labour capital ratio in NZ
L*/K* > L/K = 1.07 > 1
So AUS is labour- abundant.
Capital Labour ratio in NZ = K/L = 350/350 = 1
Capital labour ratio in AUS = K*/L* = 280/300 = 0.933
So, the capital labour ratio is greater in NZ than capital labour ratio in AUS
K/L > K*/L* = 1 > 0.933
It means NZ is capital - abundant.
Correct option is c) NZ is capital-abundant and AUS is labour-abundant.
other options are incorrect because.
Option a is incorrect because abundance is always define in relative terms by comparing ratio of labour to capital in the two country, thus no country is abundant in everything.
Option b is incorrect because AUS is labour-abundant and NZ is capital-abundant.
Option d is incorrect because we have enough of information to ans the question.