Finance
Essay by Alison Jiang • February 3, 2016 • Coursework • 1,048 Words (5 Pages) • 1,017 Views
Question one
Each nation has 900 units of resources available. To produce one unit of output the following amount of input is required
Jets | Lumber | |
Brazil | 6 | 3 |
India | 10 | 5 |
- Determine the output possibilities for each nation
Jets | Lumber | |
Brazil | 100 | 50 |
India | 60 | 30 |
- Graph the PPC for each nation (both nations on single graphs)
PPC for Brazil
Brazil PPC[pic 1][pic 2]
100[pic 3]
60[pic 4]
India PPC[pic 5]
30 50[pic 6]
- According to theory of absolute advantage, which good(s) should Brazil produce and export? And why (proof).
Absolute advantage: if your country uses fewer resources to produce a given unit of output than the other country. Brazil has absolute advantage in both cases since it uses fewer resources to produce a unit of both products as compared to India.
- According to theory of relative advantage which good (s) should Brazil produce and export and why (proof)
Comparative advantage: if your country can produce the output at a lower marginal cost in terms of other goods foregone than the other country
Marginal cost
Brazil = 50/100 = 0.5
India = 30/60 = 0.5
Therefore, both have comparative advantage since they have similar marginal cost
Question two
Each country has 1200 units of resources available. To produce unit of output, the following amount input requirement
Automobile | Machine Tools | |
Mexico | 6 | 4 |
Germany | 4 | 3 |
- Determine the output possibilities for each nation
Automobile | Machine Tools | |
Mexico | 120 | 40 |
Germany | 171.25 | 73.40 |
- Graph the PPC for each nation (both nations on single graphs)
Germany PPC[pic 7][pic 8]
171.25[pic 9]
120[pic 10]
Mexico PPC[pic 11]
40 73.40[pic 12]
- According to theory of absolute advantage, which good(s) should Mexico produce and export? And why (proof).
Absolute advantage: if your country uses fewer resources to produce a given unit of output than the other country. Mexico does not have any absolute advantage in production of any commodity since it uses many resources in producing both products
According to theory of relative advantage which good (s) should Mexico produce and export and why (proof)
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