Please answer the following assuming constant returns. -------------------------
ID: 1190051 • Letter: P
Question
Please answer the following assuming constant returns.
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Output per worker per day
Country Tons of Steel VCR's
South Korea 80 40
Japan 20 20
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- Which country has the absolute advantage in Steel? In VCRs?
- Which country has the comparative advantage in Steel? In VCRs?
- What is the opportunity cost of one VCR in Japan? In South Korea?
- With international trade, what would be the maximum amount of Steel that South Korea would be willing to export to Japan in exchange for each VCR?
- With international trade, what would be the maximum number of VCRs that Japan would be willing to export to South Korea in exchange for each ton of steel?
- Explain why constant returns might not hold up in the real world?
Explanation / Answer
Absolute advatannge refers to producing maximum units of output with avaialble in put as compared to other nation. South Korea has absolute advanatge in producing both steel and VCR.
Comparative advanatge is measured by the opportunity cost of producing a good. The lower the opportuntiy cost, the better comparative advanatge the country has over other country. SOuth Korea has to give up 2 steels to produce 1 VCR . However Japan has to give up only 1 VCR to produce one extra unit of steel. Hence SOuth korea has comparative advanage in producing steel and Japan in producing VCR.
For one VCR south Korea would be willing to give 2 units of steel.
Japan would be willing to export 1 unit of VCR for 1 unit of steel
Constant returns might not hold up due to varying oppotunity cost.