The opportunity cost of producing a laptop is lower in Laborland than in Utopia while the opportunity cost of producing wheat is lower in Utopia than in Laborland. However, Laborland can produce more of both the goods
i) Can mutually beneficial trade take place between the two countries? Explain your answer.
ii) Which country should specialize in the production of which good?
i) Mutually beneficial trade can take place between the two countries although Laborland can produce more of both the goods. This is because Laborland has a comparative advantage in the production of laptops while Utopia has a comparative advantage in the production of wheat. Specializing in the good that a country can produce at a lower opportunity cost and buying the other good from the other country allows both countries to enjoy gains from trade.
ii) Each country should specialize in the production of the good in which it has a comparative advantage and export that good to the other country. In this case, Laborland should produce laptops and Utopia should produce wheat.
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