The "Two-Country, Two-Good" Model (Sometimes Called the 2×2 Model) of Comparative

question 159

Essay

The "two-country, two-good" model (sometimes called the 2×2 model) of comparative advantage that we have studied so far is simple, insightful, and compelling. However, its very simplicity turns out to be its weakness. In the real world, when many countries produce many goods, the simple 2×2 model is of limited use in predicting patterns of trade. To see how complex such a model can become, let us consider a 2×3 model (two countries, 1 and 2, and three goods, A, B, and C.) The following table gives the maximum amounts (units) of each good that each country can produce if all the country's resources were used in the production of the respective good. In other words, the table describes each country's production possibilities frontier.
Good A (units) Good B (units) Good C (units)
Country 1 1 3 6
Country 2 2 4 4
a. How do the production possibilities frontiers for each of the two countries look in a three-dimensional coordinate system? (Draw three axes like a corner in your room, and label them after the three goods: A, B, and C. Then, place the number of units for each good for Country 1on its respective axis and connect the three intercepts by straight lines. Repeat for Country 2 on a separate graph.)
b. Calculate the opportunity costs of good A in terms of B and C in each country and call these prices PA1 and PA2 respectively.
c. Calculate the opportunity costs of good B in terms of A and C in each country and call these prices PB1 and PB2 respectively.
d. Calculate the opportunity costs of good C in terms of A and B in each country and call these prices PC1 and PC2 respectively.
e. Based on your calculations, can you tell which country should export or import each product based on comparative advantage?

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