Assume that two countries ("Japan" and "Australia") produce only two commodities - rice and autos. The resource cost per unit (in hours of labour) of producing each of the goods for each country is given in the following table: Resource Cost (hours of labour per unit of output.)

JAPAN AUST.

Autos 10 40

Rice 20 30

(a) Explain the difference between absolute advantage and comparative advantage in the analysis of a country's Production Possibilities. Which country has an absolute advantage in the production of Rice?

(b) Calculate the opportunity cost of producing each commodity in each country to determine which country has a comparative advantage in production of Rice.

(c) Assuming each country has total labour resources of 100m hours, construct the Production Possibilities Frontiers for each country.

(d) If there is no trade and Japan chooses to produce and consume 2m tonnes of Rice, how many autos can Japan produce for domestic consumers?

(e) Now assume each country specialises in the production of only the commodity in which it has comparative advantage, and they can trade at Terms of Trade 1 auto = 1 ton of rice. If Japan wishes to consume 2m tonnes of rice, how many autos can Japan have for domestic consumers?

(f) Suppose that the Production Possibilities Frontier for each country is concave to the origin. What does this shape for the Production Functions assume about the nature of production? How does this concavity affect the conclusions of the model concerning the advantages of specialisation and Trade.