David Ricardo, the British political economist, used the example of two commodit

Question

David Ricardo, the British political economist, used the example of two commodities-wine and clothproduced by England and Portugal to explain trade. The following table shows the number of labor hours it would take England and Portugal to produce one unit each of wine and cloth: Portugal England 120 Wine Cloth 80 90 100 Portugal can produce both wine and cloth using fewer labor hours than England. A group of Mercantilists, who believe that nations build their wealth by exporting more than they import, suggest that Portugal has nothing to gain from trading with England. Would you agree? A. No, because to export they have to trade, and so they must trade with England O B. Yes, because if they both produce the same two goods, there's no point in trading with England. C. Yes, Portugal produces both wine and cloth using fewer labor hours than England, so it has an absolute advantage in the production of both goods and therefore can produce more efficiently for itself D. No. gains from trade are determined on the basis of comparative advantage, not absolute advantage. Suppose that each country spends 100 hours producing each good. Fill in the table below to show how much of each good would be produced. (Round your responses to two decimal places.) Portugal 1.25 unit(s) 1.11 unit(s) England 0.83 unit(s) unit(s) Wine Cloth Fill in the table below with the opportunity costs for each country. (Round your responses to two decimal places.) Portugal England Wine Cloth Portugal has the comparative advantage in the production of wine, and England has the comparative advantage in the production of cloth

Explanation / Answer

We gain from trade due to specialization. Some countries have absolute advantage over other country like in this case England had Absolute advantage over Portugal. But due due to comparative advantage the portugal can get benefitted.

Answer D.

No of units produced with 100 labor hours

100/90 = 1.11 unit

Now we can calculate the opportunity cost

From above table we can see Portugal has minimum opportunity cost in producing 1 unit of wine 0.89 units of cloth.

England has comparative advantage over production of Cloth.

Portugal England Wine 100/80 = 1.25 units 100/120 = 0.83 units Cloth

100/90 = 1.11 unit

100/100 = 1 unit

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