Question

(5) Use the following information to determine which country has the comparative advantage in the production of (i) robots; and (ii) steel. Explain your answer—what is the basis of your determination?

FIGURE V (USA)

Production possibility	Steel per period	Robots per period
A	200	0
B	100	200
C	0	400

FIGURE VI (JAPAN)

Production possibility	Steel per period	Robots per period
A	400	0
B	200	100
C	0	200

(6) Use the following information to explain the benefits of specialization and trade.

FIGURE VII (WORLD)

Production possibility	Steel per period	Robots per period
A	600	0
B	400	400
C	0	600

Using the data presented above for the USA and Japan, determine which country should specialize in steel production and which should specialize in robot production. What is the basis of your determination?

Answer 1

5.

For the USA, opportunity cost of producing steel = 400/200 = 2 units of robots

For the USA, opportunity cost of producing robots = 200/400 = .5 units of steel

For the Japan, opportunity cost of producing steel = 200/400 = .5 units of robot

For the Japan, opportunity cost of producing robots = 400/200 = 2 units of steel

On the basis of above calculation, the USA has relatively lower opportunity cost of producing robots. So, USA has comparative advantage in producing robots. Hence, USA should specialize in producing robots.

On the basis of above calculation, the Japan has relatively lower opportunity cost of producing steel . So, Japan has comparative advantage in producing steel. Hence, Japan should specialize in producing steel.

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6.

Benefit is that, with the help of specialization and trade, the countries can produce more and consume outside the PPF curve area. It happens when each country produce the goods, in that the country owns comparative advantage. It maximizes the output level.