Answer to Question #41816 in Microeconomics for Nicole

Question

1. Assume that by devoting all of its resources to producing food, Thailand can produce 40 units of food. By devoting all of its resources to producing cloth, Thailand can produce 60 units of cloth. The corresponding production for Indonesia would be 30 food or 20 cloth. Then:

a. The terms of trade will be 3 food for 1 cloth
b. Thailand should specialize in food and Indonesia in cloth
c. Thailand should specialize in cloth and Indonesia in food
d. Neither country would benefit from specialization and trade

Answer 1

Assumingthat Thailand can produce 40 units of food or 60 units of cloth and Indonesia can produce 30 units of food or 20 units of cloth, Thailand has comparative advantage in producing cloth, as its opportunity cost of producing 1 unit of cloth is 2/3 units of food and Indonesia needs 1.5 units of food to give up to produce 1 unit of cloth. And Indontsia has comparativeadvantage in producing food.

So, the right answer is c. Thailand should specialize in cloth and Indonesia in food.