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Imagine there are two countries in the world: Country A and Country B. Suppose also that only two goods are produced in both countries: smartphones
Imagine there are two countries in the world: Country A and Country B. Suppose also that only two goods are produced in both countries: smartphones (X) and apples (Y). The production possibilities table below shows how many smartphones and how many apples the two countries can produce each year with a fixed number of resources. The numbers represents the maximum output of each good assuming all resources are allocated towards that good. Study the table and answer the questions that follow. Study the table and answer the questions that follow. Assume the # of resources is fixed Smartphones (millions) Apples (millions of bushels) Country A 10 (smart phones) 15 (apples) Country B 15 (smart phones) 30 (apples) Q1)Which country has an absolute advantage in each good? Explain how you determined your answer: a) Smartphones b) Apples Q2)Assume each country used all its resources to produce one good. Calculate the opportunity cost in terms of the other good when Country A produces nothing but i)Smartphones: ii)Apples: Country B produces nothing but i)Smartphones: ii)Apples: Q3) Based on your calculations. which country has the comparatve advantage in each good? A)Smartphones? B) Apples? Q4) Apply the principle of trade based on comparative advantage to Countries A and B above. Who should specialize in and export: A) Smartphones? B) Apples
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