APIP 57

Unit 6
ACTVIry 57
The Gains from International Trade
Use the data on the -Radios and Rice graphs to illustmte the potential gains from trade using the
theory of comparative advantage.
Indonesia today has the labor force, capital, natural resources, and technology to
produce at most 50,000 radios or at most 100,000 pounds of rice or some combination in between.
Japan, by contrast, can product at most 400,000 radios o/ 100,000 pounds of rice or
some combination in between.
1.
Draw a production possibilities curve (PPC) for each country.
fapan-Radios and Rice
lndonesla-Radios and Rice
Radios
Radios
(000's)
Ath
(000's)
300
3m
2N
2N
400
't
100
s0
lm
Rice (OO0's)
]50
2@
00
50
'100
150
2N
Rice (000's)
Adapted from a homework problem developed byJolathan Wi8ht, Unive$ity ol Richmond, Richmond, VA.
235
Unit 6
ACTIVITY 57 continued
2.
Calcutate opportunity costs of production in the table Indonesia anil lapan-Radios
anil Rice.
lndonesia and fapan-Radios and Rlce
Opportunity cost to produce
more
ice
One pound
of
One more
radio
Japan
lndonesia
3.
Which nation has an absolute advantage in rice production?
4.
Which nation has an absolute advantage in radio production?
5.
Which nation has a comparative advantage in dce production?
6.
Vvhich nation has a comparative advantage in radio production?
7.
Suppose
8.
236
that trade takes place between the two countries and that the intemational
price
of one pound of rice now equals two radios. What is the implied barter
barter
orice of radios?
Assuming that each country specializes completely ln the product for which it has
a comparative advantage, show with a dotted iine on your Radios and Rice graphs
the new consumption possibilities curve (CPC) for each country (with numbers on
the axes). This is cailed a consumption possibitities curve because consumption at
these levels can take place only after trade. How do you know consumem are better
off in each country?