Question

table 34-4

\

$$\begin{tabular}{|ll|ll|} \\hline \\multicolumn{2}{|l|}{country x} & \\multicolumn{2}{l|}{country y} \\\\ good a & good b & good a & good b \\\\ \\hline 300 & 0 & 60 & 0 \\\\ 200 & 10 & 40 & 30 \\\\ 100 & 20 & 20 & 60 \\\\ 0 & 30 & 0 & 90 \\\\ \\hline \\end{tabular}$$

refer to table 34-4. in the no specialization-no trade case, suppose country x produces and consumes 100 units of good a and 20 units of good b. country y produces and consumes 20 units of good a and 60 units of good b. if the two countries specialize and trade, and the actual amounts traded are 125 units of good a for 25 units of good b, how many more units of good a will country y consume by specializing and trading?

(a) 125
(b) 20
(c) 105
(d) 15

Explanation:

Determine specialization based on comparative advantage

For Country X, the opportunity cost of producing 10 units of Good B is 100 units of Good A (from the table, combinations are (300, 0), (200, 10), (100, 20), (0, 30)). Thus, 1 unit of B costs 10 units of A.
For Country Y, the opportunity cost of producing 30 units of Good B is 20 units of Good A (combinations are (60, 0), (40, 30), (20, 60), (0, 90)). Thus, 1 unit of B costs \(\frac{2}{3}\) units of A.
Since Country Y has a lower opportunity cost for Good B, Country Y specializes completely in Good B (producing 90 units of B and 0 units of A).
Country X specializes completely in Good A (producing 300 units of A and 0 units of B).

Calculate post-trade consumption for Country Y

Country Y produces 0 units of Good A and 90 units of Good B.
The trade terms state that 125 units of Good A are traded for 25 units of Good B.
Since Country Y specializes in Good B, it exports 25 units of Good B to Country X and imports 125 units of Good A from Country X.
Therefore, Country Y's post-trade consumption of Good A is:

$$ 0 \text{ (produced)} + 125 \text{ (imported)} = 125 \text{ units of Good A} $$

Calculate the increase in Good A consumption for Country Y

In the no-trade case, Country Y consumes 20 units of Good A.
With specialization and trade, Country Y consumes 125 units of Good A.
The increase in consumption of Good A for Country Y is:

$$ 125 - 20 = 105 \text{ units} $$

Answer:

• (A) 125
• (B) 20
• (C) 105 (Correct answer)
• (D) 15