Question

read the scenario below to help you answer the questions.

chile and uruguay have traded manufactured products such as clothing, hats, and shoes for many years. recently, uruguays economy has started to grow as new domestic companies have begun producing their own clothing and footwear. because these local producers are becoming more competitive, uruguays government is considering introducing a new trade regulation that would place a limit on the quantity of imported shoe products from chile. officials say this policy would help protect local industries from being undercut by cheaper imports. however, uruguay still plans to continue trading with chile in other goods - especially in hats, where chiles craftsmanship and production efficiency are highly valued. below is production data showing how many units of shoes and hats each country can produce using the same amount of resources.

select has an absolute advantage in producing hats.

select has an comparative advantage in producing shoes.

why should these countries choose to trade? select

Explanation:

• Absolute Advantage in Hats: Absolute advantage is when a country can produce more of a good with the same resources. Uruguay can produce 100 hats while Chile can produce 40 hats. So Uruguay has an absolute advantage in hat - production.
• Comparative Advantage in Shoes: Comparative advantage is based on the opportunity cost.
• For Chile, the opportunity cost of 1 shoe is \(40\div160 = 0.25\) hats.
• For Uruguay, the opportunity cost of 1 shoe is \(100\div200=0.5\) hats. Since Chile has a lower opportunity cost for shoes (\(0.25<0.5\)), Chile has a comparative advantage in shoe - production.
• Why Trade: Countries should trade because of the principle of comparative advantage. When countries specialize in producing goods in which they have a comparative advantage and then trade, they can consume more goods than if they tried to produce everything on their own. In this case, Chile can specialize in shoes (where it has a comparative advantage) and Uruguay can specialize in hats (where it has an absolute and potentially a comparative advantage if we consider the full analysis of opportunity costs for both goods).

Answer:

• Uruguay has an absolute advantage in producing hats.
• Chile has a comparative advantage in producing shoes.
• These countries should choose to trade because they can specialize in the production of goods in which they have a comparative advantage, leading to an overall increase in the consumption possibilities of both countries.