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Assume production takes place under constant opportunity costs. Draw two sets of axes, one for Nation...

Assume production takes place under constant opportunity costs. Draw two sets of axes, one for Nation 1 and the other for Nation 2. Draw two identical PPS’s, one for each country. Determine the comparative advantage for each country (nation I and nation II) if taste and preferences are different (i.e., each country has a different set of taste and preferences. Label you graph carefully.

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Answer #1

Below are two identical PPFs for Nation 1 and Nation 2, where Nation 1 has comparative advantage in production of good Y and Nation 2 has comparative advantage in production of good X. This is found by the opportunity cost of producing X which is 2 units of Y in Nation 1 and 0.5 units of Y in Nation 2. Opportunity costs are constant throughout so that PPFs are straight lines. Initial production and consumption bundles are shown by A and B in Nation I and Nation II respectively.

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