Assume Australia can use a given amount of its resources to produce either 20 airplanes or eight automobiles and Japan can employ the same amount of its resources to produce either 20 airplanes or 10 automobiles. Australia should specialise in:

Question

Quizplus · Accepted Answer

Australia has a comparative advantage in producing airplanes as it can produce 20 airplanes with the same amount of resources that it takes to produce only 8 automobiles. This means that the opportunity cost of producing one airplane is lower for Australia than for Japan, who can only produce 10 automobiles with the same amount of resources. Therefore, Australia should specialize in producing airplanes and export them to Japan, while Japan should specialize in producing automobiles and export them to Australia, resulting in mutual gains from trade.

Assume Australia Can Use a Given Amount of Its Resources