More Practice and Some Reflection on Comparative Advantage

Absolute v. Comparative Advantage: an exercise for practice and reflection Due: ______Here is the worksheet: Solutions are typed in hidden text. To see the solutions, choose these commands from the pull-down menus: Tools  Options  View (a tab show by the dialog box)  check the box next to Hidden Text.

Home Foreign QS =L/aLS Q*S =L*/a*LS a*LS/aLS

Labor (hr / year) L=8000 L*=8000 QT =L/aLT Q*T =L*/a*LT a*LT/aLT Soybeans (hr / bu. S) aLS = 8 a*LS = 4 Textiles (hr / yards T) aLT = 4 a*LT = 2

aLS/aLT (yd T/bu S)

aLT/aLS (bu S/yd T) 1. Use the Ricardian model of international trade to answer the following questions. The table above shows the number of hours of labor necessary to produce one unit of each good: a. Which country has absolute advantage in which good and why?

b. Which country has comparative advantage in which good and why?

Home Foreign QS =L/aLS Q*S =L*/a*LS a*LS/aLS

Labor (hr / year) L=16000 L*=8000 QT =L/aLT Q*T =L*/a*LT a*LT/aLT Soybeans (hr / bu. S) aLS = 8 a*LS = 4 Textiles (hr / yards T) aLT = 8 a*LT = 2

aLS/aLT (yd T/bu S)

aLT/aLS (bu S/yd T) 2. Use the Ricardian model of international trade to answer the following questions. The table above shows the number of hours of labor necessary to produce one unit of each good:

a. Which country has absolute advantage in which good and why?

b. What is the autarky relative price of S in Home? Explain why. Graph Home’s RS of S in autarky, and sketch an example RD curve.

c. What is the autarky relative price of S in Foreign? Use a numerical example to explain why. Graph Foreign’s RS of S in autarky, and sketch an example RD curve. Absolute v. Comparative Advantage: an exercise for practice and reflection Due: ______d. Which country has comparative advantage in which good and why?

e. Is an absolute advantage either a necessary condition or a sufficient condition to guarantee a country a comparative advantage in a good? Explain.

f. Pick a value for the relative price of S, PS/PT, in the middle of the range of its possible values. How will Home's wage rate compare to the wage rate in Foreign?

g. Draw a relative supply and relative demand diagram to illustrate your international trade equilibrium.

h. Using the value for (PS/PT) that you chose above, graph a possible international trade equilibrium showing the PPF and CPF for each country.

ALGERIA BOTSWANA

4500 7000

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2500 / / s s k k c c e e p p (

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0 0 0 200 400 600 800 1000 1200 1400 0 500 1000 1500 2000 2500 Shoes (pairs/ye ar) Shoes (pairs/year)