Consider a Ricardian world of countries, A and B, two goods, X and Y, and a single factor of production, labor, L. In country A, the production functions for goods X and Y are Qx = 0.1 Lx and Qy = 0.25 Ly, respectively, where Q denotes output and L labor. Similarly, in country B, the production functions are Qx = (1/6) Lx and Qy=Ly. Assume that countries A and B have 100 units of labor each. a) Which country has an absolute advantage in good X and which in good Y? Explain. b) Which country has a comparative advantage in good X and which in good Y? Explain. c) Suppose that the two countries trade freely and that the world relative price of good is 4 units of good Y. Furthermore, at this price, country A consumes 4/5 of what it produces and exports the rest to country B in exchange for equal-value imports. How much does each country consume from each good? Explain.

Consider a Ricardian world of countries, A and B, two goods, X and Y, and a single factor of production, labor, L. In country A, the production functions for goods X and Y are Qx = 0.1 Lx and Qy = 0.25 Ly, respectively, where Q denotes output and L labor. Similarly, in country B, the production functions are Qx = (1/6) Lx and Qy=Ly. Assume that countries A and B have 100 units of labor each. a) Which country has an absolute advantage in good X and which in good Y? Explain. b) Which country has a comparative advantage in good X and which in good Y? Explain. c) Suppose that the two countries trade freely and that the world relative price of good is 4 units of good Y. Furthermore, at this price, country A consumes 4/5 of what it produces and exports the rest to country B in exchange for equal-value imports. How much does each country consume from each good? Explain.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter1: Introducing The Economic Way Of Thinking

Section: Chapter Questions

Problem 2SQ

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