Problems

Assume that production possibilities data for the USA and Taiwan are as follows:

Production alternatives

Country Product ABC

USA Clothing 0 30 90

Food 30 20 0

Taiwan Clothing 0 20 60

Food 15 10 0

1 What is the comparative cost of clothing and food in the USA?

2 What is the comparative cost of clothing and food in Taiwan?

3 Identify the product that each country should specialize in according to comparative advantage.

4 Assume that both countries decided to specialize in a product according to the comparative advantage. With 1 food = 31/ clothing terms of trade, the USA exchanges 10 tons of its food for 35 units of Taiwanese clothing. With the assumption that B is the optimum-product mix, prepare a table such as table 2.2.

5 With a fixed investment of $10,000, the USA produces more in both clothing and food than Taiwan. Does this mean that specialization and trade do not provide any benefits for the USA?

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