Country X and Country Y are trading partners, and both produce furnaces and solar panels. The countries can produce the following amounts using equal amounts of resources:

- Country X: 6 furnaces or 8 solar panels
- Country Y: 6 furnaces or 12 solar panels

1. Which country has an absolute advantage in producing solar panels?

2. Calculate the opportunity cost of a furnace in Country Y.

3. Which country has the comparative advantage in producing furnaces? Explain.

4. If the terms of trade were that 2 furnaces are exchanged for 1 solar panel, should Country X produce solar panels domestically or import solar panels from Country Y?

Country Y has an absolute advantage in producing solar panels, while Country X has a comparative advantage in producing furnaces due to lower opportunity costs. The opportunity cost of a furnace in Country Y is 2 solar panels.

Explanation:

In the scenario provided, Country Y has the absolute advantage in producing solar panels because it can produce more solar panels (12) than Country X (8) using equal amounts of resources. To calculate the opportunity cost of a furnace in Country Y, we divide the number of solar panels it could produce by the number of furnaces. This gives us 12 (solar panels) / 6 (furnaces) = 2 solar panels per furnace.

For comparative advantage, we compare the opportunity costs. Country X's opportunity cost of producing one furnace is 8/6 solar panels (or 1.33 solar panels per furnace). Country Y, as calculated, is 2 solar panels per furnace. A lower opportunity cost means Country X has a comparative advantage in producing furnaces.

Regarding the terms of trade, if 2 furnaces are exchanged for 1 solar panel, Country X should import solar panels from Country Y because it would cost them more in terms of lost furnaces to produce the solar panels themselves, given the trade ratio is favorable when compared to their production capabilities.