Question

Consider the following data for two countries: England and Portugal:

Output per Unit of Labor

                                    Wine (barrels)            Cloth (yards)

England                         4                                            8

Portugal                       4                                            4

1. Which country, if either, country has an absolute advantage in producing Wine? Cloth? Explain.
2. Construct a table indicating the opportunity costs for each good in each country.
3. Which country, if either, has a comparative advantage in producing Wine? Cloth? Explain.
4. Would Ricardo expect trade to develop between these two countries if no tariffs are applied by either? Explain.

Answer 1

a) Ans: England has an absolute advantage in producing Cloth. No country has an absolute advantage in producing Wine.

Explanation:

Absolute advantage refers to the production of more goods with the available or existing resources.

b) Ans:

Country	Opportunity cost for Wine	Opportunity cost for Cloth
England	2 yard cloths	0.5 barrel wine
Portugal	1 yard cloth	1 barrel wine

Explanation:

The opportunity cost for  producing wine in England = 8 /4 = 2 yards of cloth

The opportunity cost for producing cloths in England = 4 / 8 = 0.5 barrel wine.

The opportunity cost for  producing wine in Portugal = 4 /4 = 1 yards of cloth

The opportunity cost for producing cloths in Portugal = 4 / 4= 1 barrel wine.

c) Ans: England has comparative advantage in producing Cloth and Portugal has comparative advantage in producing Wine.

d) Ans: Yes , Ricardo would expect trade to develop between these two countries if no tariffs are applied by either becuase the each country has comparative advantage in a perticular goods. The country which has less opportunity cost in producing a good then the country will specialize to produce that good and imports other good from other country.