Chapter 4, Problem 1CYU

a)

To determine

The question requires us to determine the country which has an absolute advantage in producing automobiles and which has washing machines.

Explanation of Solution

The following table represents the number of workers needs to produce one unit of washing machine and automobile in one day:

	Automobile	Washing machine
Italy	8	3
United States	6	2

From the given table,

Fewer workers are required to produce an automobile in the country U than in country I. So, in a given time period the production of automobiles will be higher in the U than in I. Therefore, country U has an absolute advantage in producing automobiles.

Similarly, fewer workers are required to produce a washing machine in country I than in the U. Therefore, country I has an absolute advantage in producing washing machines.

b)

To determine

The question requires us to determine the country which has a comparative advantage in producing automobiles and which has washing machines.

Explanation of Solution

The country with a lower opportunity cost of producing a product will have a comparative advantage in producing that product. A lower opportunity cost indicates a less quantity of foregone goods a country has to sacrifice to produce a particular product.

The opportunity costs of producing a unit of the automobile in country I.

  $=\frac{3}{8}\text{unit of washing machine}$

The opportunity costs of producing a unit of an automobile in the U $=\frac{2}{6}\text{unit of washing machine}$

The opportunity costs of producing a unit of washing machine in country I

  $=\frac{8}{3}\text{unit of automobile}$

The opportunity costs of producing a unit of washing machine in the US

  $\begin{array}{l}=\frac{6}{2}\\ =3\text{unit of automobile}\end{array}$

Since the opportunity cost of automobile production in the US is lower. Thus, country U has a comparative advantage in automobile production while the opportunity cost of washing machine production is lower in Italy than in the US is lower. Thus, country I has a comparative advantage in washing machine production.

c)

To determine

The question requires us to determine the specialization which results in the largest gains from trade.

Explanation of Solution

The country with a lower opportunity cost of producing a product will have a comparative advantage in producing that product. A nation has a comparative advantage will have specialization in the production of that particular good.

Since the opportunity cost of automobile production in the country U is lower. Thus, the country U has a comparative advantage in automobile production while the opportunity cost of washing machine production is lower in Italy than in the US is lower. Thus, country I has a comparative advantage in washing machine production.

So, Italy gets specialization in washing machine production while the US gets specialization in automobile production.