Pls do not handwrite the answer, this is for easy reading Question 1 i) Table 1
ID: 388118 • Letter: P
Question
Pls do not handwrite the answer, this is for easy reading
Question 1
i) Table 1 above shows the bushels of corn and the bottles of wine which Japan and Korea can produce from one day of labour under four different hypothetical situations. For each case, identify the commodity in which Japan and Korea have an absolute advantage or disadvantage for trade to occur.
ii) Compute the relative cost for Japan and Korea in their production of corn and wine to see their respective comparative advantage as basis for trade.
iii) Apart from the static gains from trade based on absolute and comparative advantage leading to efficiency and specialization and increase in world output, identify and illustrate the dynamic gains from trade as well.
Case I Case II Case III Case IV KorJap Kor Jap Kor Jap Kor Corn (bushels) Wine1 (bottles) 3 Table 1Explanation / Answer
i) Table 1 above shows the bushels of corn and the bottles of wine which Japan and Korea can produce from one day of labour under four different hypothetical situations. For each case, identify the commodity in which Japan and Korea have an absolute advantage or disadvantage for trade to occur.
Ans –
Case I: Japanese absolute advantage in corn (4 corn) and disadvantage in wine (1 wine); Korean advantage in wine (2 wine) and disadvantage in corn (1 corn).
Case II: Japanese absolute advantage in both; Korean disadvantage in both. This is because Japanese can produce more of both goods (4 corn, 3 wine) compared to Korean (1 corn, 2 wine) using one unit of resources.
Case III: Japanese absolute advantage in corn (4 corn); Korean disadvantage in corn (1 corn).
Case IV: Japanese absolute advantage in both; Korean disadvantage in both. This is because Japanese can produce more of both goods (4 corn, 2 wine) compared to Korean (2 corn, 1 wine) using one unit of resources.
ii) Compute the relative cost for Japan and Korea in their production of corn and wine to see their respective comparative advantage as basis for trade.
Case I:
In Japan, the opportunity cost of producing a bushel of corn = ¼ = 0.25 bottles of wine.
In Korea, the opportunity cost of producing a bushel of corn = 2/1 = 2 bottles of wine.
Japan has a comparative advantage in the production of corn because it has a lower opportunity cost in the production of corn.
In Japan, the opportunity cost of producing a bottle of wine = 4/1 = 4 bottles of wine.
In Korea, the opportunity cost of producing a bottle of wine = 1/2 = 0.5 bottles of wine.
Korea has a comparative advantage in the production of wine because it has a lower opportunity cost in the production of wine.
So, Japanese comparative advantage in corn and disadvantage in wine; Korean advantage in wine and disadvantage in corn
Case II:
In Japan, the opportunity cost of producing a bushel of corn = 3/4 = 0.75 bottles of wine.
In Korea, the opportunity cost of producing a bushel of corn = 2/1 = 2 bottles of wine.
Japan has a comparative advantage in the production of corn because it has a lower opportunity cost in the production of corn.
In Japan, the opportunity cost of producing a bottle of wine = 4/3 = 1.33 bottles of wine.
In Korea, the opportunity cost of producing a bottle of wine = 1/2 = 0.5 bottles of wine.
Korea has a comparative advantage in the production of wine because it has a lower opportunity cost in the production of wine.
So, Japanese comparative advantage in corn and disadvantage in wine; Korean advantage in wine and disadvantage in corn.
Case III:
In Japan, the opportunity cost of producing a bushel of corn = 2/4 = 0.5 bottles of wine.
In Korea, the opportunity cost of producing a bushel of corn = 2/1 = 2 bottles of wine.
Japan has a comparative advantage in the production of corn because it has a lower opportunity cost in the production of corn.
In Japan, the opportunity cost of producing a bottle of wine = 4/2 = 2 bottles of wine.
In Korea, the opportunity cost of producing a bottle of wine = 1/2 = 0.5 bottles of wine.
Korea has a comparative advantage in the production of wine because it has a lower opportunity cost in the production of wine.
So, Japanese comparative advantage in corn and disadvantage in wine; Korean advantage in wine and disadvantage in corn.
Case IV:
In Japan, the opportunity cost of producing a bushel of corn = 2/4 = 0.5 bottles of wine.
In Korea, the opportunity cost of producing a bushel of corn = 1/2 = 0.5 bottles of wine.
There is no comparison because both the countries have same opportunity cost in production of corn.
In Japan, the opportunity cost of producing a bottle of wine = 4/2 = 2 bottles of wine.
In Korea, the opportunity cost of producing a bottle of wine = 2/1 = 2 bottles of wine.
There is no comparison because both the countries have same opportunity cost in production of wine.
So, Japan and Korea have no comparative advantage.
iii) Apart from the static gains from trade based on absolute and comparative advantage leading to efficiency and specialization and increase in world output, identify and illustrate the dynamic gains from trade as well.
Ans –
Cases I, II, and III trade is possible. In Case IV, trade is not possible.
1. Japan gains 1 wine.
2. Korea gains 2 corn.
3. The range for the terms of trade for mutually beneficial trade are 1C=2W to 1C=.75W.
4. Japan gains 3 wine and Korea gains 1 corn.