Assume the following productivities for steel and wheat, where steel and food ar

Question

Assume the following productivities for steel and wheat, where steel and food are measured in tons Output Per Year of Labor US China Steel 100 90 Food 150 60 a) Explain which country has an absolute advantage in the production of each good. (6 points) b) Explain which country has a comparative advantage in thc production of cach good. (6 points) c Suppose that the US and China currently do not trade with cach other. Each has 1,000 ycars of labor to usc producing stecl and food. Show that US and China can both gain from tradc (10 points) by completing the following table Without Trade With Trade Gains from Trade Production Consumption Production Consumption Steel 18,000 Food 123,000 ChinaStee 63,000 Food18,000 20,000 130,000 70,000 20,000 US

Explanation / Answer

a) Us has absolute advantage in producing steel as well as food

b)For comparative advantage we compare opportunity cost

from above table its clear that O.c of producing steel in china is less comparative to us hence it has comparative advantage in steel production

on the other hand O.C of producing food is less for US hence it has comparative advantage in food production

STEEL FOOD US 150/100=1.5 100/150=.66 CHINA 60/90=.66 90/60=1.5

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