England and Scotland both produce scones and sweaters. Suppose England can produ
ID: 1248470 • Letter: E
Question
England and Scotland both produce scones and sweaters. Suppose England can produce 50 scones per hour or 1 sweater per hour. Suppose Scotland can produce 40 scones per hour or 2 sweaters per hour. Before trade England produces 25 scones and 0.5 (one half) sweaters per hour. Scotland produces 20 scones and 1 sweater per hour.a) Draw the PPF for each (put same goods on same axes for each country and connect them with a straight line). Label your diagram appropriately.
b) Does any country have an absolute advantage in both goods? Explain.
c) Identify which country has comp advantage in each good. Show your reasoning and show all computations.
d) Who should specialize in each good if trade is to occur between each country? Explain your reasoning
e) Explain the potential range of prices possible that would allow mutually beneficial trade.
f) Suppose that the countries choose to trade at a price of 35 scones for one sweater. Show the outcome after trade on your PPF and explain whether it is possible that each country is better after trade and why.
Explanation / Answer
a) just draw a graph with scones on the y axis and sweaters on the x axis. On the england graph, you want to put a point at 50 scones and 0 sweaters as well as a point at 0 scones and 1 sweater, then connect those points. Do the same for Scotland but with the appropriate numbers.
b) No, neither country has an absolute advantage in both goods. Here we see that with 1 hour of labor, England can produce more scones than Scotland, but Scotland can produce more sweaters with one hour of labor than England.
c) England has a competitive advantage in scones because the opportunity cost of 50 scones is only 1 sweater. Whereas, in Scotland, the opportunity cost of 40 scones is 2 sweaters. Scotland has a comparative advantage in sweaters. The cost of one sweater is only 20 scones. Whereas, in England, the cost of one sweater is 50 scones.
d) If trade was to occur between each country, England would specialize in scones while Scotland specialized in sweaters. This way the countries will see the maximum possible output of 50 scones and 2 sweaters for one hour of labor.
e) Because Scotland could use the time it takes them to make 1 sweater (half an hour) to make 20 scones, they would need to receive at least 21 scones for their sweater. In order to England to buy one sweater from Scotland, they would be willing to give up to 49 scones (this way they would have 1 sweater and 1 scone for 1 labor hour, instead of just 1 sweater). Therefore, the potential range of prices is 1 sweater for 21-49 scones.
f) On your original graphs, draw a point at 1 sweater and 35 scones (note: this point will be OUTSIDE the line you drew originally). As you will notice from the graph, the points are located outside the original PPF's indicating that each country would not be able to attain this level of production on its own. Therefor, we can conclude that this level of production is achieved through trade; making each country better off than they could have been alone. Please remember to rate - thank you!!!
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