Assume that two countries, Venezuela and Suriname, can produce Bananas or Cars w
ID: 1188689 • Letter: A
Question
Assume that two countries, Venezuela and Suriname, can produce Bananas or Cars with the
resources available in their countries. The maximum amount of each product produced in each country is provided in the table below.
2. Which country has a should specialize in the production of cars? Which country should
specialize in the production of bananas?
3. Assume that each country specializes production according to their comparative advan-
tage. Let's say that one trade oer leaves Venezuela with 20 Bananas and 20 Cars, while
Suriname gets 20 Bananas and 10 Cars. Would Venezuela agree to this oer? Why or
why not?
4. Assume that each country specializes production according to their comparative advan-
tage. Let's say that another trade oer leaves Venezuela with 30 Bananas. How many
Cars would Venezuela need in order to accept an oer that leaves them with 30 Bananas?
Maximum Amt of Bananas /Maximum Amt of Cars Venezuela 40 / 35 Suriname 20 / 30Explanation / Answer
2.
Table of production
Countries
Productions (suppose in 1 hour)
Banana
Car
Country V
40
35
Country S
20
30
Absolute advantage: This is the comparison between two countries, of which one is producing goods more efficiently than other.
Country V has absolute advantage of producing both banana and car, since the amounts of production for both these products are higher than the country S.
As per the absolute advantage, country V specializes both for banana and car.
Comparative advantage: This is the comparison between the two countries, of which one country has lower opportunity cost than other.
Opportunity costs are given below:
Country V
35/40 = 7/8
40/35 = 8/7
Country S
30/20 = 3/2
20/30 = 2/3
Country V has the lowest ratio in banana and the country S has the lowest ratio in car. Therefore, V has the comparative advantage in producing banana and S has the comparative advantage of producing car.
As per the comparative advantage, country V specializes in banana and country S specializes in car.
Countries
Productions (suppose in 1 hour)
Banana
Car
Country V
40
35
Country S
20
30