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5 December, 04:40

Country A has an absolute advantage over Country B in the production of both soybeans and corn. Explain a scenario in which both countries would benefit if Country A specialized in soybeans and Country B specialized in corn.

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  1. 5 December, 08:35
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    This is a key idea with international trade. This involves what is known as comparative advantage.

    let's say country A can produce a ton of soybeans in 4 hours and a ton of corn in 2 hours. While country B can produce a ton of soybeans in 15 hours and a ton of corn in 5 hours.

    Looking at this set up you can see that country A can produce both corn and soybeans faster, so they have an absolute advantage in both!

    However what trade is based on is opportunity cost. So if we think about how much corn country A has to give up to produce soybeans, they have to divert a total of 4 hours from corn to soy beans to produce one ton of soy beans. That 4 hours could be used to produce 2 tons of corn (since 2 hours for 1 ton and we're taking away 4 hours!). So opportunity cost of soybeans in country A is 2 corn.

    In country B they would need a total of 15 hours to produce one extra ton of soybeans, but those 15 hours could instead be used to produce 3 tons of corn (5 hours per ton and we're stealing 15 total hours). That means country B's opportunity cost is 3 corn.

    Since A has a lower opportunity cost in produce soybeans they will specialize and B will specialize in corn.
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