Question

Suppose that the two nations in Problem $32-4$decide to specialize in producing the good for which they have a comparative advantage and to engage in trade. Would residents of both nations find a rate of exchange of $4$bottles of wine for$1$digital TV potentially agreeable? Why or why not?

To answer Problems $32-7$and $32-8$, refer to the following table, which shows possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East Isle, in which opportunity costs of producing both products are constant.

Short answer

They used Comparative advantage concept and came up with a result that at a rate of exchange of $4$wine bottles for $1$ TV, the maximum number of units of each good that the two countries can trade is $300$.

Step-by-step solution

Step 1:Given Information

In the above given table, we have information on possible combinations of hourly outputs of modems and flash memory drives in South Shore and neighboring East Isle, in which opportunity costs of producing both products are constant.

Step 2:Explanation

Comparative advantage refers to a person's or a country's capacity to create a good or service at the lowest possible cost compared to another producer.

Step 3:

The following table displays the output of Wine Bottles and Televisions in the Border Kingdom and Coastal Realm, respectively:

Step 4:

In Border Kingdom:

the opportunity cost of a television is $5$wine bottles per television.

In Border Kingdom, the opportunity cost of wine bottles is $0.2$TV's per bottle.

In the Coastal World:

T.V. has an opportunity cost of$3$wine bottles per T.V. in Coastal Realm.

In Coastal Realm, the potential cost of wine bottles is $0.33$T.V's per bottle.

Step 5:

In Border Kingdom, the opportunity cost of making a wine bottle is lower than in Coastal Realm. As a result, the Border Kingdom has a competitive advantage in wine bottle production.

In the Coastal Realm, the opportunity cost of creating a television is lower than in the Border Kingdom. As a result, Coastal Realm enjoys a competitive advantage in the production of televisions.

Step 6:

If Border Kingdom specialises in making wine bottles, the maximum number of wine bottles the Border Kingdom can create and trade to the Coastal Realm is$300$.

As a result, at a rate of exchange of $4$wine bottles for $1$TV, the maximum number of units of each good that the two countries can trade is$300$.