Scenario: Hawaii and South Carolina are trading partners. Hawaii has an absolute advantage in the production of both coffee and tea. The opportunity cost of producing 1 pound of tea in Hawaii is 2 pounds of coffee, and the opportunity cost of producing 1 pound of tea in South Carolina is 1/3 pound of coffee.
-Refer to the scenario above.Which of the following statements is true?

Question

Quizplus · Accepted Answer

Since the opportunity cost of producing 1 pound of tea in South Carolina is 1/3 pound of coffee, South Carolina has a comparative advantage in producing tea. Therefore, South Carolina should specialize in producing tea and trade with Hawaii, which has a comparative advantage in producing coffee. The exchange rate should be closer to 1 pound of tea for 1/3 pound of coffee, so that both Hawaii and South Carolina gain from trade. However, Hawaii will gain less than South Carolina because it has an absolute advantage in both coffee and tea production.

Scenario: Hawaii and South Carolina Are Trading Partners