Suppose that Brazil can produce with an equal amount of reso

Suppose that Brazil can produce, with an equal amount of resources, either 100 unites of seetl or 10 computers. At the same time, Germany can produce either 150 units of steel or 10 computers. Explain which nation has a comparative advantage in the production of computers. CHoose a mutually advantageous trading ratio and explain why this ratio increases the welfare of both nations.

Solution

Solution:

With the equal amount of resources, Brazil produces either 100 units of steel or 10 computers

Similarly, with the equal amount of resources, Germany produces either 150 units of steel or 10 computers

Product Brazil Germany
Steel 100 150
Computers 10 10

Comparative advantage : Suppose that in both the countries there constant opportunity costs of producing steel and computers. That implies that to allocate all the available resources to produce 10 computers, Brazil has to sacrifice the production of 100 units of steel. Thus the opportunity cost of Brazil in producing 1 unit of computer is 10 units of steel. At the same time, the opportunity cost of Brazil in producing 1 unit of steel is 0.1 unit of computer. This means, the opportunity cost of for producing 10 units of steel is 1 unit of computer.

In Germany, to allocate all the resources in producing 10 units of computers, Germany has to sacrifice the production of 150 units of steel. This means the opportunity cost of Germany in producing 1 unit of computer is 15 units of steel At the same time the opportunity cost of Germany in producing 1 unit of steel is 0.06 units of computer.

This means, the opportunity cost of Brazil in producing the computers is less when compared to the Germany. At the same time, the opportunity cost of Germany in producing the steel is less when compared to Brazil. So, Brazil has the comparative advantage in the production of the computers. To be more precise, any country should choose to specialize in the activity for which they experience a lower opportunity cost.

The mutually advantageous trading ratio is 1:10. This ratio increases welfare of both the nations due to many reasons -

1) The country which is labor abundant, or capital abundant or skill abundant will be shared by the country which do not have labor abundantly, nor the capital nor the skill. This means, the resources can be shared.

2) By engaging in the international trade, both the countries could equalize their wage rates.

According to the Heckscter-Ohlin model, allowing the skilled workers to migrate to the skilled labor scarce countries and unskilled workers to the unskilled worker scarce countries reduces the ratio of skilled-unskilled workers in the skilled labor country and increases in the skilled-unskilled workers in the unskilled scarce labor country. When the two countries trade in the different factors, then the ratio of the skilled-unskilled labor or goods or any other attribute will equalize by increasing at at place where it is deficient.