Assume that an American worker can produce 7 cars per year or 16 tons of grain p

Question

Assume that an American worker can produce 7 cars per year or 16 tons of grain per year, whereas a Japanese worker can produce 20 cars per year or 8 tons of grain per year. Assume labor is the only input used in car and grain production. Japan Fill in the table below with the opportunity costs for each country.(Round your responses to fwo decimal places) has the absolute advantage in the production of cars, and the United States has the absolute advantage in the production of grain Grain Cars United States Japan The United States has the comparative advantage in the production of cars, and Japan has the comparative advantage in the production of grain Japan The United States

Explanation / Answer

The first part of the question is correctly done, i.e. Japan has an absolute advantage in the production of cars and the United States has an absolute advantage in the production of grain.

The second part of the question talks about comparative advantage and opportunity cost. The opportunity cost is the value of giving up something in order to choose an alternative.

The opportunity cost of each country is as follows (after rounding off to two decimal places) :

Grain Cars

United States 7/16 = 0.44 16/7= 2.29

Japan 8/20 = 0.4 20/8 = 2.5

The opportunity cost of United States for producing grain is = 0.44 which means that for every car the United States produces, it gives up the production of 0.44 ton of grains. The opportunity cost of United States for producing cars is = 2.29 which means that for every ton of grain it produces, it gives up the production of 2.29 cars. Same goes for Japan as well.

So, Japan clearly has a comparative advantage in grains as 0.40 < 0.44 i.e the opportunity cost of producing grain is lower in Japan than in the United States. The United States has a comparative advantage in the production of cars as 0.29 < 2.50 i.e the opportunity cost of producing cars is lower in United States than in Japan.

Hence, the second part of the question is also correctly done.

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