Question

With each unit of resources, Country A can produce 4 cars or 600 microchips

while Country B can produce 8 cars or 800 microchips.

Suppose these two countries engage in international trade. Currently, 1 car can be exchanged for 120 microchips in the international market.

1. Which country, A or B, should sell cars in international trade? How much would each country gain respectively from trading one car in international trade. Show your calculation.

Answer 1

COUNTRY A produces 4 cars or 600 Microchips

COUNTRY B produces 8 Cars or 800 Microchips

In international trade

1 Car = 120 Microchips

So,

**If Country A produces 4 Cars

4 Cars will give 4*120= 480 Microchips

whereas it could have produced 600 Microchips instead of 4 Cars. So It isn't beneficial for Country A to produce Cars.

It would result into a loss of 120/600 *100 = 20%

or loss is of 120 Microchips

** For Country B

Trade off between Cars and Microchips:

8 Cars will give 8*120= 960 Microchips in International trade which is better than 800 Microchips produced otherwise.

So For Country B it is beneficial to trade off between car and Microchips and produce CARS.

For B, Profit= 160/800*100 = 20%

or Profit is of 160 Microchips

CONCLUSION: Country B should sale CARS in INTERNATIONAL TRADE as trade off results in profit for Country B.