Assume that two countries Canada and China produce just two goods- particle board,plywood sheets- in their economies. Also assume that there is no currency in the systemand countries, if willing to trade, just exchange the two goods. The only input being usedin the production of the goods is the Labour. Canada can produce 10 particle boards or25 plywood sheets in 100 hours. China can produce 20 particle boards or 50 plywoodsheets in 100 hours.a. Does any country have absolute advantage in the production of the goods?b. Does any country have the comparative advantage in producing the particle boards?c. Does there exist a feasible exchange rate between particle board and plywood sheet(tonnes particle board / tonnes plywood sheet)? If yes, show that if countriesspecialize and trade at this exchange rate, they can both raise their consumptionlevel.

Absolute advantage and comparative advantages are the two widely used terms in Internation Trade.…

Answered: a. Does any country have absolute…

a. Does any country have absolute advantage in the production of the goods? b. Does any country have the comparative advantage in producing the particle boards?

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

Assume that two countries Canada and China produce just two goods- particle board,
plywood sheets- in their economies. Also assume that there is no currency in the system
and countries, if willing to trade, just exchange the two goods. The only input being used
in the production of the goods is the Labour. Canada can produce 10 particle boards or
25 plywood sheets in 100 hours. China can produce 20 particle boards or 50 plywood
sheets in 100 hours.
a. Does any country have absolute advantage in the production of the goods?
b. Does any country have the comparative advantage in producing the particle boards?
c. Does there exist a feasible exchange rate between particle board and plywood sheet
(tonnes particle board / tonnes plywood sheet)? If yes, show that if countries
specialize and trade at this exchange rate, they can both raise their consumption
level.

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