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Difficulty: HardTheories of International Trade (Absolute and Comparative Advantage)

The table below shows the output of Cocoa (bags) and Solar Panels (units) produced per unit of labor in Country A and Country B:

CountryCocoa (bags)Solar Panels (units)
Country A5025
Country B4040

Before trade, each country possesses 10 units of labor and allocates 5 units of labor to Cocoa production and 5 units of labor to Solar Panel production. If both countries decide to specialize completely according to the principle of comparative advantage, what is the net increase in total world output of Cocoa?

Answer: 50 bags

Answer

The net increase in total world output of Cocoa is 50 bags.
Country A has a lower opportunity cost of Cocoa (0.50.5 Solar Panels per bag of Cocoa compared to Country B's 1.01.0 Solar Panel per bag of Cocoa), giving Country A a comparative advantage in Cocoa. Before specialization, world Cocoa production is (5×50)+(5×40)=450(5 \times 50) + (5 \times 40) = 450 bags. Upon complete specialization, Country A uses all 10 labor units to produce 10×50=50010 \times 50 = 500 bags of Cocoa. The net gain in total world output of Cocoa is 500−450=50500 - 450 = 50 bags.

Step-by-Step Solution

1
Determine opportunity costs and comparative advantage for Cocoa
Country A's opportunity cost of 1 Cocoa = 0.5 Solar Panels; Country B's opportunity cost of 1 Cocoa = 1.0 Solar Panel. Country A specializes in Cocoa.
Comparative advantage belongs to the country with the lower opportunity cost in producing that commodity.
2
Calculate initial total world output of Cocoa before specialization
Country A: 5 labor units×50=250 bags5 \text{ labor units} \times 50 = 250 \text{ bags}; Country B: 5 labor units×40=200 bags5 \text{ labor units} \times 40 = 200 \text{ bags}. Total initial Cocoa output = 450 bags.
Each country initially allocates half of its 10 labor units (5 units) to Cocoa production.
3
Calculate total world output of Cocoa after complete specialization
Country A: 10 labor units×50=500 bags10 \text{ labor units} \times 50 = 500 \text{ bags}; Country B: 0 bags. Total post-specialization Cocoa output = 500 bags.
Country A devotes all 10 labor units to Cocoa production.
4
Calculate the net increase in total world Cocoa output
500 bags−450 bags=50 bags500 \text{ bags} - 450 \text{ bags} = 50 \text{ bags}.
Subtract initial aggregate output from post-specialization aggregate output.

Key Concept

Theory of Comparative Advantage and World Production Gains
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Topics

Theories of International Trade (Absolute and Comparative Advantage)

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