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Example On Comparative Advantage

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13 views7 pages

Example On Comparative Advantage

Uploaded by

Farah Wahsh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Examples on Comparative advantage

Example 1
Cost of production
(in Labor Hours)/unit
Wheat Cloth
U.S 1 3
U.K 6 4

1. Which country has an absolute advantage in producing


cloths and wheat?
2. Which country has a Comparative advantage in producing
Wheat?
3. Which country has a Comparative advantage in producing
cloth?
4. What is the number of units produced before and after
trade?
5. Calculate the gains from trade for each country.
6. What is world gain?
P= wage*hrs.
Answer
1. US an absolute advantage in producing cloths and wheat?

2.
In US
Pw=w*1 Pc=w*3

Pc/pw= w*3 /w*1 = 3 Pc= 3Pw


Pw/pc= w*1/w*3 =1-3 Pw= 1/3 Pc

Pw/pc =w*1 / w*3= 1/3 pw= 1/3 pc

US has a comparative adv. In producing Wheat


In UK
Pw/Pc= 6/4=1.5 Pc/Pw = 4/6 = 0.6
UK has a comparative adv. In producing cloth

3- No. of units before trade


Wheat Cloth
U.S 1 1
U.K 1 1
4- No. of units after Specialization
Wheat Cloth
U.S 4 0
U.K 0 2.5

5&6 Gain = after – before


Wheat Cloth
U.S 4-1= +3 0-1= -1
U.K 0-1=-1 2.5-1= 1.5
World +2 +0.5
Example 2:
Output per labor hour
cars Cloth
U.S 30 units 30 yards
U.K 10 units 5 yards

1. Which country has a an absolute advantage in producing


cloths and cars?
2. Which country has a Comparative advantage in producing
cloths ?
3. Which country has a Comparative advantage in producing
cars?
4. Calculate the gains from trade for each country.
Note: If the international price ratio of traded goods is 1car =
0.6 cloth
Answer
1- US an absolute advantage in producing cloths and cars.

- In US
Cars
30units 30 yards
1 unit 1 yard
Cloths
30 yards 30 units
1 yards 1 units

- In UK
Cars
10 units 5yards
1unit 0.5 yards

Cloths
5 yards 10 units
1 yards 2 units
2- US has a Comparative advantage in producing cloths.
3- UK has a Comparative advantage in producing cars.

4- After trade
international price 1 car = 0.6 cloths
Therefore, the international price 1 cloths = 1.67 cars (inverse
of international price 1 car)

Before trade
In US In UK
1car = 1 cloth 1car=0.5 cloth
1cloth = 1car 1cloth = 2 cars

For price of car


UK World US
0.5 > 0.6 > 1

Price of cloth
UK World US
2 < 1.67 < 1
Since Us has a comparative advantage in producing cloth, so Us
will import cars from UK and according to international price 1
car = 0.6 cloth which means it is much cheaper for US as before
trade to production of 1 car = 1cloth.
So gain for UK from specialization in cars is= + 0.1 cars

Since UK has a comparative advantage in producing cars, so Uk


will import cloth from US and according to international price 1
cloths = 1.67 cars which means it is much more cheaper for US
as before trade to production of 1 car = 1cloth.

So gain for US from specialization in cloth is = + 0.67 cloth


(1.67-1= + 0.67 )

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