Question

The tables below illustrate production possibilities for Japan and the US in the production of electronic equipment EE) and autos (AU). The following questions are based on these tables and pertain to Absolute and Comparative Advantage. Assume each country has the same amount of inputs and allocated 50% of its inputs to electronic equipment and 50% to autos. US is producing at “C” (48, 18) and Japan at “T” (66, 38) [middle columns]. Answer the following questions regarding Absolute and Comparative Advantage in the production of electronic equipment (EE) or autos (AU).  
US Production Possibilities Table

	Production Possibilities
Product	B	C	D
Electronic Equipment (EE)	40	48	80
Automobiles (AU)	20	18	10

  
Japan Production Possibilities Table

	Production Possibilities
Product	S	T	U
Electronic Equipment (EE)	60	66	120
Automobiles (AU)	40	38	20

1. The (constant) Opportunity Cost of producing another auto (AU) in Japan US is ________.

2. Ignore the table in the previous questions. Suppose the Electronic Equipment and Automobile OCs for the US are OC_EE = -.20 and OC_AU = -5, respectively. Suppose the OCs for Japan are OC_EE = -.40 and OC_AU = -2.5. Based on these OCs, the US should specialize in ____ and Japan should specialize in ____.

	A.	AU; EE.
	B.	EE; AU.
	C.	Neither, both should produce both AU and EE.

3. The Pandemic has caused policy makers and others to examine the Global Economy and the production of medical supplies, masks and other goods and services. Suppose we compare the current manufacturing situation with China and the US. If we subscribe to the extreme position of the Diamond Model,

	A.	the real issue is not Comparative Advantage but rather the Clustering of businesses in industries needed for a country to be competitive.
	B.	the real issue is the Comparative Advantage that China continues to enjoy over the US.
	C.	the real issue is Absolute Advantage - the Chinese worker is much more productive than the US worker.
	D.	the real issue is the US no longer has the expertise to manufacture domestically.

Answer 1

(1) If the production moves from T to S, 40 Autos (AU) will be produced, i.e., 40 - 38 = 2 additional AU, which will require Japan to sacrifice 60 - 66 = -6 Electrical Equipments (EE). Hence, for 1 AU, -6/2 = -3 EE. Therefore, opportunity cost of producing an AU = -3 EE for Japan. Similarly, for US, the opportunity cost of 1 AU = (40-48)/(20-18) = -8/2 = -4 EE.

(2) US should specialize in EE and Japan should specialize in AU.

(3) The correct option should be (A) the real issue is not Comparative Advantage but rather the clustering of businesses in industries needed for a country to be competitive.