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 cloth--produced 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: PortugalEngland Wine Cloth 120 100 80 90 Portugal can produce both wine and cloth using fewer labor hours than England. Agroup 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. 0 B. No, gains from trade are determined on the basis of comparative advantage, not absolute advantage. Yes, because if they both produce the same two goods, there's no point in trading with England. C. No, because to export they have to trade, and so they must trade with England. D. 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 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 0.83 uns) .25 unis) England Wine Cloth 1 units) 1.1 unit(s) 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. Both Neither England Portugal

Explanation / Answer

Correct answer:

A

A country can have absolute advantages, but gains from the trade can be achieved using the law of comparative advantage. It will make countries focus upon specialization and they do international trade.

--------

For Portugal, amount of wine produced = 100/120 = .83 units

For Portugal, amount of cloth produced = 100/100 = 1 unit

For England, amount of wine produced = 100/80 = 1.25 units

For England, amount of cloth produced = 100/90 = 1.11 units

----------

For Portugal, opportunity cost of wine = 1/.83 = 1.204 units of cloths

For Portugal, opportunity cost of cloth = .83/1 = .83 units of wine

For England, opportunity cost of wine = 1.11/1.25 = .89 units of cloths

For England, opportunity cost of cloth = 1.25/1.11 = 1.13 units of wine

----------

England has comparative advantage in production of wine, and Portugal has comparative advantage in production of cloth.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.