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Table 2.5 Solution

Table 2.5 shows the production possibilities of wheat (bushels/hour) and cloth (yards/hour) for the United States and United Kingdom under four cases. For each case: 1) It identifies which country has an absolute advantage in each good based on which can produce more units per hour. 2) It indicates which country has a comparative advantage in each good based on which has a lower opportunity cost of production. 3) Trade is possible and mutually beneficial in all cases based on comparative advantage. Countries can specialize and gain from trade.

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2K views3 pages

Table 2.5 Solution

Table 2.5 shows the production possibilities of wheat (bushels/hour) and cloth (yards/hour) for the United States and United Kingdom under four cases. For each case: 1) It identifies which country has an absolute advantage in each good based on which can produce more units per hour. 2) It indicates which country has a comparative advantage in each good based on which has a lower opportunity cost of production. 3) Trade is possible and mutually beneficial in all cases based on comparative advantage. Countries can specialize and gain from trade.

Uploaded by

Marghoob Ahmad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Table 2.5.

Production possibilities in the united state and united kingdom

Case A Case B Case C Case D

U.S U.K U.S U.K U.S U.K U.S U.K

Wheat (bushels /hour) 4 1 4 1 4 1 4 2

Cloth (yards/hour) 1 2 3 2 2 2 2 1

1. Table 2.5 shows bushels of wheat and the yards of cloth that the United States and the United
Kingdom can produce with one hour of labor time under four different hypothetical situations.
In each case, identify the com- modity in which the United States and the United Kingdom
have an absolute advantage or disadvantage.

Awnser:

In Case A, the United States has an absolute advantage in producing both wheat and cloth
because it can produce more units of both goods in one hour of labor time compared to the
United Kingdom. In Case B, the United States has an absolute advantage in producing wheat,
while the United Kingdom has an absolute advantage in producing cloth. In Case C, the United
States has an absolute advantage in producing wheat, while the United Kingdom has an
absolute advantage in producing cloth. In Case D, the United States has an absolute advantage
in producing wheat, while the United Kingdom has an absolute advantage in producing cloth.

2. With respect to Table 2.5, indicate in each case the commodity in which each nation has a
comparative advantage or disadvantage.
Answer:

In Case A, the United States has a comparative advantage in producing both wheat and cloth
because it has a lower opportunity cost of producing each good compared to the United Kingdom. In
Case B, the United States has a comparative advantage in producing wheat, while the United
Kingdom has a comparative advantage in producing cloth. In Case C, the United States has a
comparative advantage in producing wheat, while the United Kingdom has a comparative advantage
in producing cloth. In Case D, the United States has a comparative advantage in producing wheat,
while the United Kingdom has a comparative advantage in producing cloth.

3. With respect to Table 2.5, indicate in each case whether or not trade is possible and the basis
for trade.
Answer:

In all four cases, trade is possible and mutually beneficial because both countries can benefit
from specializing in producing the good in which they have a comparative advantage and trading
with each other. The basis for trade is comparative advantage.

4. Suppose that in Case B in Table 2.5 the United States exchanges 4W for 4C with the United
Kingdom.
(a) how much the united states gain in term of cloths?
Solution:
If the United States exchanges 4W for 4C with the United Kingdom in Case B, the United States
gains 2 yards of cloth, which is the difference between the 6 yards of cloth it would have given
up to produce 4W and the 8 yards of cloth it receives in exchange for 4W.
(b) how much the united kingdom gain in term of cloths?
Solution:

The United Kingdom gains 2 yards of cloth, which is the difference between the 4 yards of cloth
it would have given up to produce 4C and the 6 yards of cloth it receives in exchange for 4C.
(c) What is the range for mutually beneficial trade?

Solution:

The range for mutually beneficial trade is between the opportunity costs of producing wheat and
cloth in each country. In Case B, the United States has an opportunity cost of producing 1/4 yard of
cloth for each bushel of wheat it produces, while the United Kingdom has an opportunity cost of
producing 1/2 bushel of wheat for each yard of cloth it produces. Therefore, the range for mutually
beneficial trade is between 1/4 yard of cloth and 1/2 bushel of wheat.

(d) How much would each nation gain if they exchanged 4W for 6C instead?
Solution:
If they exchanged 4W for 6C instead in Case B, the United States would gain 3 yards of cloth,
which is the difference between the 9 yards of cloth it would have given up to produce 4W and
the 12 yards of cloth it receives in exchange for 6C. The United Kingdom would gain 2 bushels of
wheat, which is the difference between the 2 bushels of wheat it would have given up to
produce 6C and the 4 bushels of wheat it receives in exchange for 4W.
5. Use the information for Case B in Table 2.5 and assume that labor is the only factor of pro-
duction and is homogeneous (Le., all of one type).
(a) What is the cost in terms of labor content of producing wheat and cloth in the United
States and the United Kingdom?
Answer:
The cost in terms of labor content of producing wheat and cloth in the United States and the
United Kingdom can be calculated by dividing the number of units produced per hour by the
number of hours of labor required to produce them. In Case B, the labor content of
producing one bushel of wheat in the United States is 1/4 hour, while the labor content of
producing one yard of cloth is 1/2 hour. In the United Kingdom, the labor content of
producing one bushel of wheat is 1 hour, while the labor content of producing one yard of
cloth is 1 hour.
(b) What is the dollar price of wheat and cloth in the United States if the wage rate is $67
Answer:

If the wage rate is $67, the dollar price of wheat in the

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