Question

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

a. Who has the absolute advantage in the production of rubber or radios? How can you tell?

b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?

c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?

d. In this example, does each country have an absolute advantage and a comparative advantage in the same good?

e. In what product should Japan specialize? In what product should Malaysia specialize?

Short answer

a. Japan- Radios, Malaysia- Rubber

b. Japan- 5, Malaysia- 20, Japan

c. Japan- 160, Malaysia- 40, Malaysia

d. Yes

e. Japan- Radios, Malaysia- Rubber

Step-by-step solution

Step1. Given information

The output table as given in the question is:

	Rubber	Radios
Japan	5	80
Malaysia	10	40

Step2. Absolute Advantage

a)

According to Absolute Advantage theory, which country can produce more as compared to other country given the same resources (in terms of labor hours) used.

Hence, Japan can produce more (80>40) Radios and Malaysia can produce more (10>5) Rubber. So, they have respective absolute advantage than the other country.

Step3. b) Opportunity Cost

b)

Following is the Opportunity cost table:

	Rubber	Radios
Japan	80/5	5/80
Malaysia	40/10	10/40

Opportunity cost for producing 80 radios:

Japan- 80* 5/80= 5 units rubber

Malaysia= 80* 10/40= 20 units rubber

Lower the opportunity cost, higher is the comparative advantage. Hence, Japan has the comparative advantage.

Step4. c)Opportunity Cost

c)

From the above opportunity cost table,

opportunity cost for producing 10 units rubber:

Japan- 10* 80/5= 160

Malaysia- 10* 40/10= 40

Hence, Malaysia has comparative advantage as it has lower opportunity cost than Japan.

Step5. Explanation

d)

As from the above explanation, each country has comparative and absolute advantage in the same good, i.e. Japan has in Radios and Malaysia has in Rubber.

Step6. Implication

e)

It can hence be implied from above calculation and explanation that Japan should specialize in Radio production and Malaysia should specialize in Rubber production.