Grp03 S01 - Comparative Advantage Qn05

Seminar 1 Problem Solving International Trade Theory A. Smith and D. Ricardo

Question 05 Use Information for case B above and assume that labour is the only factor of production and is homogeneous. (a) What is the cost in terms of labour content of producing wheat and cloth in the US and UK ? (b) What is the dollar price of wheat and cloth in the US if the wage rate is $6 ? ( c) What is the pound price of wheat and Production possibilities in the UScloth and in the UK Case B Case B UK rate : if the wage is £1 ? (US)

(UK)

Wheat (bushels/labour-hour)

4

1

Cloth (yards/labour-hour)

3

2

Production possibilities in the US and Case B (US)

Case B (UK)

Wheat (bushels/labour-hour)

4

1

Cloth (yards/labour-hour)

3

2

UK :

Answer 5 (a) In US, Cost of producing 1 bush of wheat (in terms of labour content) = 1/4 labour hour Cost of producing 1 yard of cloth (in terms of labour content) = 1/3 labour hour

Production possibilities in the US and Case B (US)

Case B (UK)

Wheat (bushels/labour-hour)

4

1

Cloth (yards/labour-hour)

3

2

UK :

Answer 5 (a) In UK, Cost of producing 1 bush of wheat (in terms of labour content) = 1/1 labour hour = 1 labour hour Cost of producing 1 yard of cloth (in terms of labour content)

Production possibilities in the US and Case B (US)

Case B (UK)

Wheat (bushels/labour-hour)

4

1

Cloth (yards/labour-hour)

3

2

UK :

Answer 5 (b) If the wage rate in US is $6 dollar, Cost of producing 1 bush of wheat in US = $6/4 = $1.5 dollar Cost of producing 1 yard of cloth in US = $6/3

Production possibilities in the US and Case B (US)

Case B (UK)

Wheat (bushels/labour-hour)

4

1

Cloth (yards/labour-hour)

3

2

UK :

Answer 5 (c) If the wage rate in UK is £1, Cost of producing 1 bush of wheat in UK = £1/1 = £1 Cost of producing 1 yard of cloth in UK = £1/2 = £0.5