Question

Two countries begin to trade - “Chi0” and “Per0” in two goods “Silver” and “Copper”

Chil0 produces take 80 days to produce a ton of Silver and 30 days to produce a ton of copper.

Per0 takes 60 days to produce a ton of silver and 25 days to produce a ton of copper.

1.        Who has an absolute advantage in Silver? Copper?

2.        Who has a comparative advantage in Silver? Copper?

3.        The opportunity cost for one ton of copper is how many tons of silver in Per0? In Chil0?                                 

4.     Please offer a plausible term of trade when they open up to trade:

Answer 1

a) Per0 has an absolute advantage in the production of both silver and copper (lesser number of days taken to produce 1 ton of each good)

b) Per0 has a comparative advantage in producing silver while Chi0 has a comparative advantage in producing copper (lower opportunity cost - see part c))

c) Opportunity cost of 1 ton of copper (Per0) = 25/60 = 0.42 tons of silver

Opportunity cost of 1 ton of copper (Chi0) = 30/80 = 0.375 tons of silver

d) plausible term of trade lies between the opportunity costs of two countries.

E.g. 1 ton of copper in exchange for 0.4 tons of silver