The table below shows the input requirement in labor-hours needed to produce one unit of Wheat and one unit of Solar Panels in Country Alpha and Country Beta:
| Country | Wheat (1 unit) | Solar Panels (1 unit) |
|---|---|---|
| Country Alpha | 4 labor-hours | 8 labor-hours |
| Country Beta | 6 labor-hours | 18 labor-hours |
Based on the principle of comparative advantage, which of the following statements correctly identifies the specialization pattern for both countries and the mutually beneficial terms of trade range for 1 unit of Solar Panels?
- Country Alpha specializes in Solar Panels, Country Beta specializes in Wheat, and 1 Solar Panel exchanges for between 2 and 3 units of Wheat.Answer
- BCountry Alpha should produce both goods because it has an absolute advantage in both, while Country Beta should not engage in international trade.
- CCountry Beta specializes in Solar Panels and Country Alpha specializes in Wheat because Beta requires more total labor-hours for industrial production.
- DCountry Alpha specializes in Solar Panels, Country Beta specializes in Wheat, and 1 Solar Panel exchanges for between 0.33 and 0.50 units of Wheat.
Answer
Country Alpha specializes in Solar Panels, Country Beta specializes in Wheat, and 1 Solar Panel exchanges for between 2 and 3 units of Wheat.
Country Alpha needs 8 labor-hours for 1 Solar Panel and 4 labor-hours for 1 Wheat, meaning 1 Solar Panel costs 2 units of Wheat. Country Beta needs 18 labor-hours for 1 Solar Panel and 6 labor-hours for 1 Wheat, meaning 1 Solar Panel costs 3 units of Wheat. Alpha has a lower opportunity cost in Solar Panels and should specialize in them, while Beta has a lower opportunity cost in Wheat (0.33 Solar Panels vs 0.5 Solar Panels) and should specialize in Wheat. For trade to benefit both nations, 1 Solar Panel must buy more Wheat than Alpha can produce internally (2 units) but less than Beta must forego internally (3 units).
Step-by-Step Solution
Key Concept
Law of Comparative Advantage (Input-based Calculation)