Suppose there are only 2 Nations,A and B,and only two goods,x and y.If Nation A produces only x,it can make 16x per day.If Nation A produces only y,it can make 4y per day.If Nation B produces only x,it can make 20x per day.If Nation B produces only y,it can make 4y per day.After trade begins,Nation ________ will specialize in the production of x and Nation ________ will specialize in the production of y.

Question

Quizplus · Accepted Answer

For both nations, the opportunity cost of producing one unit of x is lower than producing one unit of y. 
For Nation A, the opportunity cost of producing one unit of x is 4y/16x = 1/4y, while the opportunity cost of producing one unit of y is 16x/4y = 4x. 
For Nation B, the opportunity cost of producing one unit of x is 4y/20x = 1/5y, while the opportunity cost of producing one unit of y is 20x/4y = 5x.

Therefore, Nation A has a comparative advantage in producing x (lower opportunity cost), while Nation B has a comparative advantage in producing y (lower opportunity cost). After trade, Nation A will specialize in producing x and trade with Nation B for y. Nation B will specialize in producing y and trade with Nation A for x.

Suppose There Are Only 2 Nations,A and B,and Only Two