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Suppose that the two nations in Problem 32-4decide to specialize in producing the good for which they have a comparative advantage and to engage in trade. Would residents of both nations find a rate of exchange of 4bottles of wine for1digital TV potentially agreeable? Why or why not?

To answer Problems 32-7and 32-8, refer to the following table, which shows possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East Isle, in which opportunity costs of producing both products are constant.

Short Answer

Expert verified

They used Comparative advantage concept and came up with a result that at a rate of exchange of 4wine bottles for 1 TV, the maximum number of units of each good that the two countries can trade is 300.

Step by step solution

01

Step 1:Given Information

In the above given table, we have information on possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East Isle, in which opportunity costs of producing both products are constant.

02

Step 2:Explanation

Comparative advantage refers to a person's or a country's capacity to create a good or service at the lowest possible cost compared to another producer.

03

Step 3:

The following table displays the output of Wine Bottles and Televisions in the Border Kingdom and Coastal Realm, respectively:

04

Step 4:

In Border Kingdom:

the opportunity cost of a television is 5wine bottles per television.

In Border Kingdom, the opportunity cost of wine bottles is 0.2TV's per bottle.

In the Coastal World:

T.V. has an opportunity cost of3wine bottles per T.V. in Coastal Realm.

In Coastal Realm, the potential cost of wine bottles is 0.33T.V's per bottle.

05

Step 5:

In Border Kingdom, the opportunity cost of making a wine bottle is lower than in Coastal Realm. As a result, the Border Kingdom has a competitive advantage in wine bottle production.

In the Coastal Realm, the opportunity cost of creating a television is lower than in the Border Kingdom. As a result, Coastal Realm enjoys a competitive advantage in the production of televisions.

06

Step 6:

If Border Kingdom specialises in making wine bottles, the maximum number of wine bottles the Border Kingdom can create and trade to the Coastal Realm is300.

As a result, at a rate of exchange of 4wine bottles for 1TV, the maximum number of units of each good that the two countries can trade is300.

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Most popular questions from this chapter

Refer to your answers to Problem 32-7when answering the following questions.

a. Which one of the following rates of exchange of modems for flash memory drives will be acceptable to both nations: (i) 3modems for 1flesh drive; (ii) 1modem for 1flash drive; or (iii) 1flash drive for 2.5modems? Explain.

b. Suppose that each nation decides to use all available resources to produce only the good for which it has a comparative advantage and to engage in trade at the single feasible rate of exchange you identified in part (a). Prior to specialization and trade, residents of South Shore chose to produce and consume 30modems per hour and 90flash drives per hour, and residents of East Isle chose to produce and consume 40modems per hour and 30flash drives per hour. Now, residents of South Shore agree to export to Fast Isle the same quantity of South Shore's specialty good that Fast Isle residents were consuming prior to engaging in international trade. How many units of East Isle's specialty good does South Shore import from East Isle?

c. What is South Shore's hourly consumption of modems and flash drives after the nation specializes and trades with East Isle? What is East Isles hourly consumption of modems and flash drives after the nation specializes and trades with South Shore?

d. What consumption gains from trade are experienced by South Shore and East Isle?

Why do you think that increased specialization in specific agricultural products has accompanied growth in African exports of those products?

Consider the table and answer the questions that follow.

a. What is the opportunity cost of producing modems in South Shore? Of producing flash memory drives in South Shore?

b. What is the opportunity cost of producing modems in Fast Isle? Of producing flash memory drives in East Isle?

c. Which nation has a comparative advantage in producing modems? Which nation has a comparative advantage in producing flash memory drives?

Based on your answers to Problem 32-1, which nation has a comparative advantage in producing pastries? Which nation has a comparative advantage in producing sandwiches?

Suppose that the two nations in Problems 32-1and 32-2choose to specialize in producing the goods for which they have a comparative advantage. They agree to trade at a rate of exchange of 1pastry for 1 sandwich. At this rate of exchange, what are the maximum possible numbers of pastries and sandwiches that they could agree to trade?

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