In one hour, the united states can produce 25 tons of steel or 250 automobiles. in one hour, japan can produce 30 tons of steel or 275 automobiles. draw the production possibility frontiers. for each country compute the opportunity cost ratios for cars and steel. which country has the absolute advantage in the production of steel? which country has the absolute advantage in the production of cars? within what range will trade take place

Explanation

Figure 1-A showing America's Production Possibility Frontier, where on x Axis Steel Production per hour and on Y-Axis Automobiles or Cars Production. The Maximum level of Automobiles America Produces is 250 spending all of its resources over production of Automobiles where as 25 tons Steel maximum it can produce spending all of its resources producing Steel so the line between the two maximum attainable points is the production possibility frontier for cars and steel per hour for America.

Figure 1-B showing Japan's production possibility Frontier, where on Y-Axis is the 275 cars which it can produce spending all of its resources and on X-Axis the 30 tons of steel and line joining both is the production possibility frontier for Japan.

Table 1 and Figure 2, showing opportunity cost for America and Japan where two production possibility frontiers are drawn in one graph and diff levels of trade off's between cars (y-axis) and steel (x-axis) are compared

from the table the conclusion about the absolute and comparative advantage can be drawn as japan produces higher levels of both products so it has absolute advantage of producing both cars and steel over America , but Japan produces 1.1 times more cars then America and 1.2 times more Steel then America indicating it has comparative advantage in producing steel then Cars, however comparative advantage in true sense is when the opportunity cost for producing a product is less compared to producing other the graph in Figure 2, shows that for America if production of cars reduces from 150 to 100 America produces 5 tons more steel from level 10 to 15 at x-axis where as for same levels if Japan reduces its production from 150 to 100 Japan produces 8 tons more steel. so opportunity cost for producing more steel for Japan is less as it has to forgo lesser number of cars compared to America if America has to produce 8 tons more steel it has to forgo more of its cars as compared to Japan.

The trade between two countries is possible at levels where both has  comparative advantage the output (global production) will be greater if both countries trade at levels where they have advantage like America should trade at levels where it spends more of its resources producing cars and Japan should trade at levels where it produces more of its resources producing Steel. A country can not forgo production of a product where it does not have absolute or comparative advantage as it would lead to sect-oral unemployment.

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