1. Suppose there are only two countries, A and B, using the same currency and two goods, X and Y, in the world. The cost of producing one unit of X is $12 in A and $8 in B. The cost of producing one unit of Y is $3 in A and $4 IN b. Assume these costs are fixed. Use numbers to support your answers.
(a). Explain how to determine which country has absolute advantage in producing X and Y.
(b). Explain how to determine which country has comparative advantage in producing X and Y. What is your recommendation on specialization of production for each country?
(c) Assume A has resources that worth $300 and B has resources that worth $2400 in which both countries use half of their resources to produce X and Y when there is no trade. According to the recommendation in part (b), compute the gains in total world output due to specialization and gains in consumption in each country due to trade if both countries trade half of their specialized output with the other country. Determine the terms of trade.