Many of the goods that China’s Citizens enjoy are produced abroad, and many of the goods produced in the China are sold abroad. When goods are produced abroad and sold domestically, the process is called import and when goods are produced domestically and sold abroad, that process is called export. Suppose an average worker in China can produce one kg of soybeans in 40 minutes and one Kg of coffee in 120 minutes, while an average worker in Paraguay can produce one kg of soybeans in 100 minutes and one kg of coffee in 150 minutes. Answer the following questions.
Which country has the absolute advantage in coffee? Explain.
Which country should produce coffee? Explain.
If the two countries specialize and trade with each other, which country will import coffee? Explain.
Assume that the two countries trade with each other and the country importing coffee trades 2 Kgs of soybeans for 1 Kg of coffee. Explain why both countries will benefit from this trade.
