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Absolute advantage in automobile production

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Reference no: EM132632140

Assume the following information shows the output of 2 goods in 2 countries before specialization. [Also assume that the same amount of resources are used by both countries and are equally divided between their two industries, A and C.]

Automobiles Computers U.S. 20 15 Germany 15 5

a. Which country has the absolute advantage in automobile production? Why?

b. In Germany, the opportunity cost of producing 1 automobile is the loss of _________.

c. Which country has the comparative advantage in automobile production? Why?

d. If both countries produce according to the respective comparative advantages, what goods will the U.S. and Germany end up producing after specialization?

e. Gains from Trade: How many more units of total output (automobiles + computers) will be produced after specialization?

f. Terms of Trade: If the U.S. and Germany trade with each other, and the U.S. sends Germany 10 computers, at least how many autos will the U.S. expect in return? Be specific.

g. Draw the PPF for both the U.S. and Germany given the information above. Check your answer to question "f" by showing that the new A/C combination is outside each country's PPF.

Reference no: EM132632140

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