The table below shows the production possibilities of two countries, X and Y, of two goods, A and B, given a fixed amount of resources and particular technology
The table below shows the production possibilities of two countries, X and Y, of two goods, A and B, given a fixed amount of resources and particular technology. (For country X: a worker can produce per month 78A or 26B. For country Y a worker can produce per month Y: 96A or 48B).
| A | B | |
| X | 78 | 26 |
| Y | 96 | 48 |
1. Which country has the absolute advantage in A, and which country has the absolute advantage in B? (1 Mark)
2. Calculate X’s opportunity cost of A in terms of B (1 Mark)
3. If the two countries were to specialize and trade with each other, indicate and explain which country would import A. (1Mark)
4. Assume the countries decide to specialize and trade and settled on a trading price of 2.5 A per B. Explain why the country that specializes in B would experience gains from trade. (1 Mark)
