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US production of Chevrolet, Japan production of Toyota

I have come across this type of scenario several times in college and in personal business ventures. Understanding these scenarios helps us understand a small piece of microeconomic strategy.

Assume the US can produce Toyotas at the cost of $18,000 per car and Chevrolets at $16,000 per car. In Japan, Toyotas can be produced at 1,000,000 yen and Chevrolets at 500,000 yen. In terms of Chevrolets what is the opportunity cost of producing Toyotas in each country? Who has the comparative advantage in producing Chevrolets? Assume Americans purchase 500,000 Chevrolets and 300,000 Toyotas each year and the Japanese purchase far fewer of each. Using productive efficiency as the guide, which country should produce Chevrolets and which should produce Toyotas?

Solution Preview

In order to accurately obtain the answer to this problem it would be wise to use a currency converter to decipher what the equivalent of the U.S. dollar was to the Japanese Yen. It is fairly easy to find currency converters all over the internet. I found that 1,000,000¥ equals $10,419.92 with the exchange rate and 500,000¥ equals $5,209.96 with the exchange rate. Converting the currency rate of both countries ...

Solution Summary

Using productive efficiency as a guide to answering this question I have concluded that Japan, having the comparative advantage in producing Chevrolets, should produce Chevrolets and the United States should therefore produce Toyotas.

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