(Table) Macrostan and Econostan are neighboring countries with populations of about 10 million people each and land area of 30 to 31 million square miles each. The table shows total output of cheese and wool if each country splits its resources evenly toward the production of both products. Who is likely to be the exporter of each product if voluntary trade is based on comparative advantage?

Question

Quizplus · Accepted Answer

According to the principle of comparative advantage, each country should specialize (produce and export) in the product that they can produce relatively more efficiently (at lower opportunity cost) than their trading partner. To determine which country has a comparative advantage in each product, we need to compare their opportunity costs of producing cheese and wool.

Opportunity cost of Cheese production:
- In Macrostan: 1 unit of cheese requires the sacrifice of 1/2 unit of wool (since each country splits its resources evenly)
- In Econostan: 1 unit of cheese requires the sacrifice of 2 units of wool

Opportunity cost of Wool production:
- In Macrostan: 1 unit of wool requires the sacrifice of 2 units of cheese
- In Econostan: 1 unit of wool requires the sacrifice of 1/2 unit of cheese

Based on these opportunity cost ratios, we can see that Macrostan has a comparative advantage in wool production (since its opportunity cost of producing 1 unit of wool is lower than Econostan's opportunity cost), while Econostan has a comparative advantage in cheese production (since its opportunity cost of producing 1 unit of cheese is lower than Macrostan's opportunity cost). Therefore, based on comparative advantage, Macrostan should export wool and Econostan should export cheese. Choice C is correct.

(Table) Macrostan and Econostan Are Neighboring Countries with Populations of About