Grp06 S01 - Pre-ricardian Q04

Comparative Advantage Q4

Wheat (bushels/labor hour) Cloth (yards/ labor hour)

Case B (US) 4

Case B (UK) 1

3

2

4.

Suppose that in case B, the US exchange 4W for 4C with UK. a. How much US gain? b. How much UK gain?

4a.

US exchanges 4W that it produces in 1 hr for 4C from UK. US can produce 3C in 1 labor hr. Therefore US gain (4C – 3C) = 1C in labor hr, US gain: 1/3 hr (1C that it gain divided by 3C that it can produce in 1 hr.)

4b.

UK will need to produce 4C to exchange with US. In order for UK to produce 4C: [4C / (2C x 1hr)] = 2 hr [4C divided by (2C that in can produce in 1 hr)] UK exchanges 4C that it took 2 hr to produce for 4W from US. UK can produce 1W in 1 labor hr. UK needs 4hr to make 4W (4W divided by 1W that it can produce in 1 hr = 4hr) Therefore, UK gains (4hr – 2hr) = 2hr

4c.

How much would each nation gain if they exchanged 4W for 6C instead? US exchanges 4W that it produces in 1 hr for 6C from UK. US can produce 3C in 1 labor hr. Therefore US gain (6C – 3C) = 3C in labor hr, US gain: 1 hr (3C that it gain divided by 3C that it can produce in 1 hr.)

UK will need to produce 6C to exchange with US. In order for UK to produce 6C: [6C / (2C x 1hr)] = 3 hr [6C divided by (2C that in can produce in 1 hr)] UK exchanges 6C that it took 3 hr to produce for 4W from US. UK can produce 1W in 1 labor hr. UK needs 4hr to make 4W (4W divided by 1W that it can produce in 1 hr = 4hr) Therefore, UK gains (4hr – 3hr) = 1hr