Suppose there are two countries of equal size, Northampton and Southampton. Both

Question

Suppose there are two countries of equal size, Northampton and Southampton. Both countries both produce and consume two goods: food and clothes. If both countries used all their resources to produce only food, Northampton would produce 50 tons while Southampton would produce 400 tons. If both countries used all their resources to produce only clothes, Northampton would produce 100 tons while Southampton would produce 200 tons. According to Ricardo’s theory of comparative advantage, what should these countries do in order to maximize their own ability to consume clothes and food? Should they specialize in any one product? If so, which country should specialize in what product? Should they trade with each other?

Explanation / Answer

According to Recardian model, countries should specialize in tasks, in which they have comparative advantage. In this case, Southampton has more comparative advantage in producing food and Northampton has more comparative advantage in producing clothes relative to food. Therefore Northampton and Southampton should specialize in Clothes and food respectively. This way, they will end up producing 400 tons of food and 100 tons of clothes. And they should trade with each other to satisfy each other’s needs of food and clothes.

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