Australian and Japanese workers can each produce four cars a year. An Australian worker can produce 10 tonnes of grain a year, whereas a Japanese worker can produce five tonnes of grain a year. To keep things simple, assume that each country has 100 million workers.

a For this situation, construct a table similar to Table 3.1.

b Graph the production possibilities frontier of the Australian and Japanese economies.

c For Australia, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table similar to Table 3.3.

d Which country has an absolute advantage in producing cars? In producing grain?

e Which country has a comparative advantage in producing cars? In producing grain?

f Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?

g Starting from a position without trade, give an example in which trade makes each country better off.