Required to Produce Unit of Output a. Which country has absolute advantage in wh

Question

Required to Produce Unit of Output a. Which country has absolute advantage in which good? Why? b. Which country has comparative advantage in which good? why? c. What is the pre-trade price ratio in each country? Why? d. What will be the post-trade price ratio or international terms of trade? e. Which country would prefer an international terms of trade of 5? 3? Why? f. Let W_A = wage rate in A in terms of A's currency W_B = wage rate in B in terms of B's currency R = exchange rate defined as number of units of B's currency per unit of A's currency. Then, in order to have balance of payments equilibrium, (W_A.R)/W_B must lie in some range, i.e., m

Explanation / Answer

a.
Country B has absolute advantage in both the goods, because with the same resources it can produce more goods.
b.
Country A has comparative advantage in good x because it has a lower opportunity cost in terms of y than country B.
Country B has a comparative advanatage in good y because it has a lower opportunity cost in terms of x than country A.
c.
Pre-trade price ratio is 1 by 5 for country A whereas for country B is 1 by 3.
d.
Post trade price ratio will be between 1by5 and 1by 3
x y
Country A 5 1
b 15 5

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