Question

Refer to Exhibit 34-9. In the no specialization-no trade case, suppose country X produces and consumes 100 units of good A and 20 units of good B. Country Y produces and consumes 20 units of good A and 60 units of good B. If the two countries specialize and trade, and the actual amounts traded are 125 units of good A for 25 units of good B, how many more units of good B will country Y consume by specializing and trading?

Answer 1

75

Step-by-step explanation:

Opportunity cost of good A for country X = Total B given up/Total A gained = (10-0)/(300-200) = 10/100 = 0.1

Opportunity cost of good A for country Y = Total B given up/Total A gained = (30-0)/(60-40) = 30/20 = 1.5

So, Country A has comparative advantage in production of good X. Thus it will produce only X = 300. Amount traded = 125. So, amount left = 300-125 = 175. Extra X consumed by A = 175 -100 = 75