ECO203: (International Economics)
Module / Subject / School:
ECO203: International Economics
Singapore University of Social Sciences (SUSS)
Requirements
Consider two countries – Country A and Country B – producing two goods – Good X and Good Y.
Using all its resources, Country A can produce either 50X or 100Y. Using all its resources, Country B can produce either 40X or 110Y.
- Assume constant opportunity costs. Derive the comparative advantages in the production of the goods. Present using a table and describe your answers. Solve for a mutually beneficial Terms of Trade (in terms of 1X: _Y, to the nearest 0.5 units). (Word limit: 250 words)
(10 marks)
What we score?
70%
Our Writer’s Comment
This assignment is designed to assess students’ understanding of business practices.
To secure an A+ grade, adhere to these guidelines and make sure your work aligns with the grading criteria:
Step 1: Calculate Opportunity Costs
You’ll first need to determine the opportunity costs for each country in producing Good X and Good Y. Opportunity cost is what each country gives up to produce one unit of a good.
- Country A: If Country A can produce either 50X or 100Y, the opportunity cost of producing 1X is 100Y/50X = 2Y. So, for every 1 unit of X, Country A gives up 2 units of Y. The opportunity cost of producing 1Y is 50X/100Y = 0.5X.
- Country B: If Country B can produce either 40X or 110Y, the opportunity cost of producing 1X is 110Y/40X = 2.75Y. For 1Y, the opportunity cost is 40X/110Y ≈ 0.36X.
Step 2: Identify Comparative Advantage
Comparative advantage is determined by which country has a lower opportunity cost for each good:
- Country A has a lower opportunity cost for producing X (2Y vs. 2.75Y), so Country A has the comparative advantage in producing X.
- Country B has a lower opportunity cost for producing Y (0.36X vs. 0.5X), so Country B has the comparative advantage in producing Y.
Step 3: Create a Table
Now, present these opportunity costs and comparative advantages in a clear table format. For example:
| Country | Opportunity Cost of 1X (in Y) | Opportunity Cost of 1Y (in X) | Comparative Advantage |
|---|---|---|---|
| Country A | 2Y | 0.5X | Good X |
| Country B | 2.75Y | 0.36X | Good Y |
Step 4: Determine Terms of Trade
For mutually beneficial trade, the terms of trade should be between the opportunity costs of the two countries. Since Country A’s opportunity cost for 1X is 2Y and Country B’s is 2.75Y, the terms of trade should be between these values.
You can solve for a mutually beneficial terms of trade, such as 1X = 2.5Y. This allows both countries to benefit from the trade, as each will be trading at a rate better than their opportunity cost.
Step 5: Write a Clear Explanation
In your 250-word limit, explain the process clearly but concisely. Focus on the key points:
- How you calculated opportunity costs.
- How you identified comparative advantage.
- Why the chosen terms of trade are beneficial for both countries.
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