ECO203: (International Economics) Assume constant opportunity costs. Derive the comparative advantages in the production of the goods. Present using a table and describe your answers.

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.

(a) 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)

What we score:

80%

Our Writer’s Comment

1. Understand the Concept of Comparative Advantage

Before diving into the math, make sure you’re clear on the core concept: comparative advantage. It’s about which country can produce a good at a lower opportunity cost compared to the other country. Opportunity cost means what you have to give up to produce something else.

In this case, you need to figure out the opportunity cost for Country A and Country B for producing Good X and Good Y. That’s key to finding out which country has the comparative advantage in each good.

2. Set Up the Opportunity Cost Calculations

For Country A:

If they produce 50X, the opportunity cost is 100Y. So, the opportunity cost of producing 1X = 100Y ÷ 50X = 2Y.
If they produce 100Y, the opportunity cost is 50X. So, the opportunity cost of producing 1Y = 50X ÷ 100Y = 0.5X.

For Country B:

If they produce 40X, the opportunity cost is 110Y. So, the opportunity cost of producing 1X = 110Y ÷ 40X = 2.75Y.
If they produce 110Y, the opportunity cost is 40X. So, the opportunity cost of producing 1Y = 40X ÷ 110Y = 0.36X.

3. Identify Comparative Advantage

Now that you have the opportunity costs, you can compare them:

Country A has a lower opportunity cost for producing Good X (2Y vs. 2.75Y), so Country A has a comparative advantage in producing Good X.
Country B has a lower opportunity cost for producing Good Y (0.36X vs. 0.5X), so Country B has a comparative advantage in producing Good Y.

Make sure you present this clearly in your table, showing the opportunity costs for both countries and identifying where each country has the comparative advantage.

4. Solve for Mutually Beneficial Terms of Trade

To find the mutually beneficial Terms of Trade, you want to determine an exchange rate that benefits both countries. It has to lie between their opportunity costs. For Good X:

Country A’s opportunity cost of 1X is 2Y.
Country B’s opportunity cost of 1X is 2.75Y.

So, a mutually beneficial trade would have Country A trading 1X for between 2Y and 2.75Y. You can present this as something like: “A possible Terms of Trade could be 1X: 2.5Y.”

5. Present Your Answer Clearly

Keep your explanation concise and clear. Since there’s a word limit, you’ll want to be efficient with your words. Here’s a suggested structure:

Start by briefly explaining the concept of comparative advantage and opportunity cost.
Present the opportunity cost calculations in a table (make sure the table is easy to read).
Identify which country has the comparative advantage in each good.
Solve for the mutually beneficial Terms of Trade and explain how you derived it.

6. Keep an Eye on the Word Limit

Since the word limit is 250 words, be sure to use your words wisely. Keep the description of comparative advantage short, and focus more on your calculations and reasoning.

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