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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.

a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

b. If England and Scotland decide to trade, which commodity will Scotland export to England? Explain.

c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade? Explain.

Subpart (a):

To determine

Calculate opportunity cost.

Explanation

Workers in England have an absolute advantage in producing scones because they can make 50 scones in an hour while Scottish workers can make only 40 scones per hour. On the other hand, Scottish workers had absolute advantage in producing sweaters as they can manufacture 2 per hour compared to the English workers who could make only 1 in an hour.

For comparative advantage, the calculation of opportunity cost is required.

Opportunity cost of producing a sweater for Scottish workers is calculated as,

Opportunity cost sweaterScotland=No. of scones produced per hourNo. of sweater produced per hour=402=20 scones

Opportunity cost of producing a sweater for English workers is calculated as,

Opportunity cost sweaterEngland=No. of scones produced per hourNo. of sweater produced per hour=501=50 scones

Since the opportunity cost of producing a sweater is lower for Scottish workers, Scotland has a comparative advantage in the production of sweaters

Subpart (b):

To determine

Comparative advantage.

Subpart (c):

To determine

Gains from the trade.

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