Question

1.

Pineapples	Bananas
Macro Islands	200	800
Micro Islands	400	400

The table is messed up, it's pineapples first then last vertical row of numbers is bananas
The table above shows the number of acres it takes to produce one container of pineapples and one container of bananas for two nations.

Which nation has the comparative advantage in producing pineapples? Explain.

Which nation should specialize in the banana production? Explain.

Which nation has the absolute advantage in the production of each product? Explain

2.

Assume interest rates increase in Mistyville but not in Silvania. Using a correctly labeled foreign exchange graph for Silvania, show and explain the impact of the change in interest rates on each of the following:

the supply of Silvania’s dollar.

the international value of Silvania’s dollar.

Silvania’s net exports.

Answer 1

1. A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Macro Islands:

200 pineapples = 800 bananas

1 pineapple = 800/200 = 4 bananas

Opportunity cost of 1 pineapple is 4 bananas.

Micro Islands:

400 pineapple = 400 bananas

1 pineapple = 400/400 = 1 banana

Opportunity cost of 1 pineapple is 1 banana.

Micro Island has comparative advantage in the production of pineapple.

Macro Island has comparative advantage in the production of bananas.

Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

Macro Islands has an absolute advantage in the production of Bananas.