Answer to Question #227770 in Macroeconomics for Lucy

Question

Consider two countries, China and South Africa, both producing textiles and beer. The table below shows output rates per day in the two (2) countries, if all resources are fully and efficiently employed. 

  Textiles Beer

China 5 10

South Africa 1 6

Q1

1. There is no opportunity for mutually beneficial trade between the two (2) countries.
2. China has a comparative advantage in the production of textiles and beer.
3. South Africa has a comparative advantage in the production of beer.
4. The countries will not trade with each other as China can produce more of both goods without trading with South Africa

Answer 1

From the given table we can observe that if all resources are fully employed then China can produce either 5 units of textiles or 10 bottles of beer. Hence in order to produce 1 unit of textiles, it has to sacrifice 2 bottles of beer.

Similarly, South Africa can produce 1 unit of textiles or 6 bottles of beer. Hence, the opportunity cost of production of 1 unit of textiles is 6 bottles of beer.

So we see that the opportunity cost is much higher for South Africa as compared to China. Hence the theory of comparative advantage tells us that China should specialise in the production of textiles and South Africa should specialise in the production of beer.

But if trade happens in this manner, then post-trade China will produce 5 units of textiles and South Africa will produce 6 units of beer.

In the pre-trade situation, in order to obtain 1 bottle of beer, China had to give up 0.5 units of textiles. Post-trade, in order to obtain 1 bottle of beer, China has to sacrifice 1.2 units of textiles. Hence we see that trade cannot take place advantageously for both the nations.

Therefore, statements 1, 2 and 4 are true.