Assume there are 2 countries: China and Denmark. Given the same amount of inputs
ID: 1206638 • Letter: A
Question
Assume there are 2 countries: China and Denmark. Given the same amount of inputs, the table below shows how much apples and beets they can produce.
a. Which country has an absolute advantage in apples? In beets? Explain.
b. What is the relative cost of producing apples in China? In Denmark?
c. Will China and Denmark benefit from trade with each other? Explain.
d. What is the range for the final terms of trade between the two countries?
China Denmark Apples Beets 500 -100 300 200 100 es Beets ec 10 100 150 200 280 100Explanation / Answer
a)China has absolute advantage in producing apples and Denmark has it in producing beets because Absolute advantage compares the productivity of different producers or economies. The producer that requires a smaller quantity inputs to produce a good is said to have an absolute advantage in producing that good.
b)relative cost of producing 50 apples in China is 8 beets and so on and in Denmark it is 400 beets to produce only 20 apples and so on.
c) yes both the countries will get benefit from trade with each other by comparative advantage as Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another. Even if one country has an absolute advantage in producing all goods, different countries could still have different comparative advantages. If one country has a comparative advantage over another, both parties can benefit from trading because each party will receive a good at a price that is lower than its own opportunity cost of producing that good. Comparative advantage drives countries to specialize in the production of the goods for which they have the lowest opportunity cost, which leads to increased productivity.
d) Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100. The terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other. For example, if a country exports 50 dollars' worth of product in exchange for 100 dollars' worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30% deterioration in its terms of trade.