Trade theories suggest that both countries gain from trade. In a 2-country, 2-good model, we assume the 2 states—Futland and Tandam share a common currency (allowing us to ignore exchange rate), they both have the same wages, and they both produce two goods: bicycles and boots. The units of labour requirement are shown below, assuming constant returns to scale. Production Techniques: Units of labour hour required per unit output Tandom Futland Bicycles 90 hours 120 hours Boots 30 hours 50 hours i. Briefly explain absolute advantage theory by Adam Smith and comparative advantage theory by David Ricardo. Which country has an absolute advantage in the production of each good?
Trade theories suggest that both countries gain from trade. In a 2-country, 2-good model, we assume the 2 states—Futland and Tandam share a common currency (allowing us to ignore exchange rate), they both have the same wages, and they both produce two goods: bicycles and boots. The units of labour requirement are shown below, assuming constant returns to scale. Production Techniques: Units of labour hour required per unit output Tandom Futland Bicycles 90 hours 120 hours Boots 30 hours 50 hours i. Briefly explain absolute advantage theory by Adam Smith and comparative advantage theory by David Ricardo. Which country has an absolute advantage in the production of each good?
Chapter20: International Trade
Section20.1: International Trade Theory
Problem 1ST
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Trade theories suggest that both countries
Production Techniques:
Units of labour hour required per unit output
|
Tandom |
Futland |
Bicycles |
90 hours |
120 hours |
Boots |
30 hours |
50 hours |
i. Briefly explain absolute advantage theory by Adam Smith and
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