Tutorial 13
UBEA 1013: ECONOMICS
TUTORIAL 13:
INTERNATIONAL TRADE AND EXCHANGE RATE
Structure Questions:
Tables below show the production and consumption condition for Japan and South
Korea.
Electronic
Food
Electronic
Food
Production (million units per
unit of input)
Japan
South Korea
30
10
10
8
Consumption
(million units)
Japan
South Korea
150
50
20
16
Input allocation (millions unit)
Japan
South Korea
5
5
2
2
1. Which countries (Japan or South Korea) are more efficient in producing
electronic and food from the respectively view? Give a brief explanation.
i. Absolute advantage
ii. Comparative advantage
2. Should you encourage both countries to trade based on the respectively view?
i. Absolute advantage
ii. Comparative advantage
3. If Japan and South Korea would to specialize and trade with each other, which
country should specialize in what production?
4. Assume that the term of trade is 2.5 units of electronic for 1 unit of food and
Japan wish to consume 20 million units of food after trade. How can the trade
be done?
5. Compare the total production of both countries before the trade with total
production after the trade. What can you comment regarding the benefit of
specialization and international trade?
6. What is the range for term of trade to enable a fair trade between Japan and
South Korea?
Elise/hwm
1
Tutorial 13
Answers: Structure Questions
Note: The process below will explain how comparative advantage gives rationale to
encourage specialization and international trade.
Summary of Comparative Advantage Case between Japan & South Korea
Input / Output without trade:
A. Unit of input (million):
Electronic production
Food production
Japan
South Korea
5
2
5
2
30
10
10
8
C. Total output (million units)
Electronic
Food
5*30 = 150
2*10 = 20
5*10 = 50
2*8 = 16
200
36
D. Consumption (million units)
Electronic
Food
150
20
50
16
200
36
Japan
South Korea
Total
7
0
0
7
10/30 = 0.33
8/10 = 0.80
30/10 = 3.00
10/8 = 1.25
7*30 = 210
0*10 = 0
0*10 = 0
7*8 = 56
– 20*2.5 = – 50
+ 20
20*2.5 = + 50
– 20
B. Output per unit of input (units)
Electronic
Food
Input/output with free trade:
A. Unit of input (million):
Electronic production
Food production
B1. Opportunity cost:
One additional unit of electronic
(unit of food product)
One additional unit of food
(unit of electronic)
C. Total output (units)
Electronic
Food
How can the trade be done? (million units)
Japan sell electronic to South Korea
South Korea sell food to Japan
D. Consumption (million units)
Electronic production
160
Food production
20
Term of trade = 2.5 units of electronic for 1 unit of food.
Elise/hwm
50
36
Total
210
56
210
56
2
Tutorial 13
1. Which countries more efficient?
i. Absolute advantage: Japan has the absolute advantage in both
productions over South Korea. For both electronic and food, Japan
can produce more output than South Korea with the same number
of input. Therefore, Japan is more efficient in producing electronic
and food from the absolute advantage point of view.
ii. Comparative advantage: Japan is more efficient in producing
electronic from the comparative advantage point of view because
Japan opportunity cost in producing more electronic output is
lower than South Korea (0.33 for Japan compare to 0.80 for South
Korea). South Korea is more efficient in producing food from the
comparative advantage point of view because South Korea
opportunity cost in producing more food output is lower than Japan
(1.25 for South Korea compare to 3.00 for Japan).
2. Should you encourage both countries to trade based on the respectively view?
iii. Absolute advantage: No as Japan has the advantage (more efficient) in
the production of both electronic and food. This is indicated by a
higher output per unit of input.
iv. Comparative advantage: Yes as Japan and South Korea has efficiency
in different production. Japan is more efficient in producing
electronic product while South Korea is more efficient in
producing food.
3. (It is assumed that Japan & South Korea trade in the view of benefit they can
get from comparative advantage). Each country should specialize in what they
are relatively more efficient. So, Japan should specialize in the production of
electronic while South Korea should specialize in the production of food.
4. Japan imports (South Korea exports) 20 million units of food. In return, Japan
exports (South Korea received from Japan) 50 million units of electronic to
South Korea.
5. Total electronic output before trade = 200 million units.
Total electronic output after trade = 210 million units.
Increment = 210 – 200 = 10 million units.
Total food output after trade = 56 million units.
Total food output after trade = 36 million units.
Increment = 56 – 36 = 20 million units.
6. The range will be the maximum opportunity cost for each country, therefore is
between 1.25 units of electronic for 1 unit of food to 3.00 units of electronic
for 1 unit of food. [Alternative: Between 0.33 units of food for 1 unit of
electronic to 0.80 units of food for 1 unit of electronic]
Elise/hwm
3