(d) Which country has the comparative advantage in food? In fuel? Explain. (e) Which good(s) should each country specialize in? *(f) Calculate the gains from trade from specialization.
This is a continuation from my previous posted question
d.
The comparative advantage is the ability of the economy to produce a commodity at the least opportunity cost of production in the economy. The opportunity cost of producing Food and Fuel in Japan can be calculated as follows:
Thus, the opportunity cost of producing Food in Japan is 4.21 units of fuel per unit of food and similarly, the opportunity cost of producing a unit of fuel is 0.24 units of food. In a similar way the opportunity costs of Peru can be calculated as follows:
Thus, the opportunity cost of producing a unit of food is 2.37 units of fuel in Peru and the same for producing a unit of fuel is 0.42 units of food. This means that the production of food is cheaper in Peru and the production of fuel is cheaper in Japan. Thus, Japan has a comparative advantage in producing Fuel and Peru in producing Food.
Step by step
Solved in 3 steps with 2 images
