Question on comparative advantage?
china can produce 100 shirts or 80 socks and australia can produce either 80 shirts or 40 socks. discuss how both countries might benefit from specialisation adn trade
Answer:
Comparative advantage is about what you need to give up to make something (opportunity cost), not how much you can make (absolute advantage).
So if Australia can make a shirt for 0.5 socks, and China can only do it for 0.8. Likewise China can make a shirt for 1.25 socks, Australia can only do it for 2. Therefore both countries can benefit from specialisation and trade.
China: 1 shirt = 0.8 socks
Australia: 1 shirt = 0.5 socks
Australia has comparative advantage at shirts, so they should make them, and China makes socks. Then they trade.
Assume they both like equal amounts of shirts and socks, and productuion frontier is linear between the two extremes.
Then without trade:
Aus. make 26.7 shirts and socks
China makes 44.4 shirts and socks
total is 71.1
With trade, the Aussies make 80 shirts and chinese make 80 socks. That's 8.9 more than old total, so they can can split it and both have more than before.
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