Question

Assume the following information for South Korea and Australia in the production of TVs and iron-ore. With one unit of production (a mixture of land, labour, capital, and technology) South Korea can produce 20 TVs or 16 tons of iron-ore, whereas, Australia can produce 12 TVs or 24 tons of iron-ore. Each country dedicates a total of 1000 units of production for TVs and iron-ore. This information is reproduced in the following table:

Country	TVs	Iron-ore
South Korea	20	16
Australia	12	24

1. Assume complete specialisation in which South Korea produces only TVs and Australia produces only iron-ore. What happens to total production?
2. Explain the theories Absolute and Comparative advantage in trade. Does South Korea have an absolute, a comparative advantage, or both, in the production of TV’s and why?

Answer 1

i) When south Korea only produces TVs, it will produce 1000*20 = 20000 TVs

When Australis only produces Iron-ore, it will produce 1000*24 = 24000 Iron-ore

ii) The absolute advantage in trade occurs when a country can produce more of a good compared to the other country whereas comparative advantage occurs when a country can produce a good at a lower opportunity cost compared to the other country

Find the comparative advantage by calculating the opportunity cost-

OC to produce TV in

South Korea = 16/20 = 0.8

Australia = 24/12 = 2

OC to produce Iron ore in

South Korea = 20/16= 1.25

Australia = 12/24 = 0.5

so, South Korea has an absolute advantage and a comparative advantage in the production of TV

Similarly, Australia has an absolute advantage and a comparative advantage in the production of Iron-ore.