England Portugal Labor force 25 200 Number of bottles of wine per worker 40 50 N
ID: 1119719 • Letter: E
Question
England
Portugal
Labor force
25
200
Number of bottles of wine
per worker
40
50
Number of wheels of cheese
per worker
4
1
(a) Which country has an absolute advantage in the production of each good? Which country
has a comparative advantage in the production of each good?
(b) Suppose prices/wages are in terms of wine. Assuming each country spends 50% income on cheese and 50% on wine, with no trade, what is the wage and price of cheese in
each country? What is the total production of wine and cheese in each country?
(c) Suppose each country specializes in their comparative advantage good. After trade, what is the total global production of each good?
England
Portugal
Labor force
25
200
Number of bottles of wine
per worker
40
50
Number of wheels of cheese
per worker
4
1
Explanation / Answer
Ans A.
Portugal has absolute advantage in production of each good. It can produce 200*50=10000 wine bottles as compared to 25*40=1000 wine bottles of England and 200*1=200 cheese wheel as compared to 25*4=100 cheese wheels of england.
Portugal has comparitive advantage in producing wine as the labour is more efficient and can produce 50 bottles as compared to 40 bottles of england.
Whereas England has comparative edge in producing cheese wheel as each labour can produce as compared to 1 of Portugal.
Ans b) Since prices are in terms of wine and each spends 50% on cheese. Money spent on cheese by England = 500. Production of cheese by 25 labours is 100 cheese wheel. Thus price per wheel $5(500/100) and labour cost $20(500/25).
Similarly Money spent on cheese by Portugal = 5000. Production of cheese by 200 labours is 200 cheese wheel. Thus price per wheel $25(5000/200) and labour cost $25(5000/200).
Total production in each country:-
England - Wine 1000 bottles & cheese 100 wheels
Portugal - Wine 10000 bottles & cheese 200 wheels
Answer c)Total global production- Cheese 100 wheels by england and wine 10000 bottles by portugal
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