The paper “ Economics of International Trade” is a thrilling example of the assignment on macro & microeconomics. From the above table, it can be observed that Atlantis Island has an absolute advantage in computer production. Lemuria Island, on the other hand, has an absolute advantage in Cloths production. Adam Smith, in his theory of absolute advantage, states that trade occurs among two nations if one nation has an absolute advantage in producing one commodity and the other nation has an absolute advantage in producing another commodity. Therefore, in these two Islands, Atlantis will specialize in computer production in which it has an absolute advantage over Lemuria while Lemuria will specialize in cloth production in which it has an absolute advantage over Atlantis. i) Production possibility frontier for Atlantis ii) Production possibility frontier for Lemuria In Atlantis, the number of labor hours available for clothes production is (½)*2000 labor hours per week and for computer, production is (½)*2000 labor hours per week.
Similarly, in Lemuria, the labor hours per week available for clothes and computer production are (½)*3600 each. Therefore, in Atlantis, the number of computers and clothes produced will be (1000/20)*1=50 and (1000/10)*1=100 respectively.
In Lemuria, the number of computers and clothes produced will be (1800/45)*1=40 and (1800/15)*1=120. This information can be shown in the PPF as follows In Atlantis The global production of clothes and computers will be 220 and 90 respectively. The opportunity cost of producing one computer in Atlantis is two clothes foregone. In Lemuria, the opportunity cost of producing one computer is three clothes foregone. In Atlantis (hrs. /unit of cloth)/ (hrs. / Unit of comp) = (2000/200)/ (2000/100) = 0.5 In Lemuria (hrs. /unit of cloth)/ (hrs.
/unit of comp) = (3600/240)/ (3600/80) =0.33 Since 0.5 is greater than 0.33, it implies that Atlantis has comparative advantage in production of clothes. The pattern of trade will be; Atlantis will specialize in clothes production while Lemuria will specialize in computer production. If all resources in Atlantis are directed towards clothes production then 200 units of clothes and 0 units of computers will be produced. In Lemuria, if all resources are directed towards computer production then 0 units of clothes and 80 units of computers will be produced.
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