Using the Figure above for Australia and New Zealand determine which country has the comparative advantage in the production of cotton and which the comparative advantage in the production of wheat
What will be an ideal response?
We must first calculate the opportunity costs of the production of both goods for both nations. The opportunity cost of cotton in Australia is 1/3 of a ton of wheat for each ton of cotton (600 C = 150W). The opportunity cost of cotton in New Zeland is three tons of wheat (200C = 600W). Therefore, Australia enjoys a comparative advantage in the production of cotton. The opportunity cost of wheat in Australia is therefore 1 wheat = 3 tons of cotton. The opportunity cost of wheat in New Zealand is 1 wheat = 1/3 cotton. Therefore, New Zealand enjoys a comparative advantage in the production of wheat.
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