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Ch3 - Chapter 3 Gains from Trade Practice Question 1Page 14...

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Chapter 3: Gains from Trade. Practice Question , 1Page 14, Workbook You are given the following information. It shows the amount of output per worker . Output per worker Car Grain (tons) United States 4 10 Japan 4 5 a. Suppose each country has 100 million workers. Complete the table below. Output per country Car Grain (tons) United States 400 million 1000 million Japan 400 million 500 million b. Who has an absolute advantage in car production? in grain production? Neither country has an absolute advantage in producing cars, since they have the same output per worker. The U.S. has an absolute advantage in producing grain c. Graph the PPF for each country. You could draw two separate graphs as in part “g” These are the intercepts of the PPF. With 100 million workers and four cars per worker, if either economy were devoted completely to cars, it could make 400 million cars. Since a U.S. worker can produce 10 tons of grain, if the U.S. produced only grain it would produce 1,000 million tons. Since a Japanese worker can produce 5 tons of grain, if Japan produced only grain it would produce 500 million tons. Note that since the tradeoff between cars and grain is constant, the production possibilities frontier is linear. 1

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d. Complete the table below which show the opportunity cost of production for each country. Opportunity Cost of one Car (in terms of tons of grain given up) ton of Grain (in terms of cars given up) U.S. 2/5 Japan 4/5 Since a U.S. worker produces either 4 cars or 10 tons of grain, the opportunity cost of 1 car is2½ tons of grain (which is 10÷4). Since a Japanese worker produces either 4 cars or 5 tons of grain, the opportunity cost of 1 car is 1¼ tons of grain (which is 5÷4). Similarly, the U.S. opportunity cost of 1 ton of grain is 2/5 cars (4÷10) and the Japanese opportunity cost of 1 ton of grain is 4/5 cars (4 ÷5). e. Who has a comparative advantage in cars? Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up f. Who has a comparative advantage in grain? The U.S. has a comparative advantage in producing grain, since it has a lower opportunity cost in terms of cars given up. g. Suppose the two countries specialize in the production of the good in which it has a comparative advantage. Show the output combination for each country on its respective PPF that you drew in part (c). Label the US output “U” and Japan’s output “J”.
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