What Happens When a Country Has an Absolute Advantage in All Goods

Problems

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

  1. Who has the absolute advantage in the production of rubber or radios? How can you tell?
  2. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?
  3. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?
  4. In this example, does each country have an absolute advantage and a comparative advantage in the same good?
  5. In what product should Japan specialize? In what product should Malaysia specialize?

Review the numbers for Canada and Venezuela from Table which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

  1. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.
  2. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber.
  3. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

In [link], is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?