Question

Suppose that in the United States 4 worker-hours are required to produce each unit of clothing and each unit of food. In Canada, 1 worker-hour is required for each unit of clothing and 2 worker hours are required for a unit of food. Show your work.

A. Which country has an absolute advantage in each good?

B. Which country has a comparative advantage in each good?

C. If the labor force of the United states increases by a factor of 20, will anything happen to the pattern of trade? You do not need to provide numerical details. Will the gains of trade for the U.S. be higher or lower than when the two countries have the same labor force?

Answer 1

A. Canada has absolute advantage in both the goods. As it requires less labor hours to produce both the goods than US.

B. Opportunity cost of 1 unit of clothing in US = Total food not produced in US in 4 hours = 1 unit of food
Opportunity cost of 1 unit of food in US = Total clothing not produced in US in 4 hours = 1 unit of clothing

Opportunity cost of 1 unit of clothing in Canada = Total food not produced in Canada in 1 hour = 1/2 = 0.5 unit of food
Opportunity cost of 1 unit of food in Canada = Total clothing not produced in Canada in 2 hours = 2*1 = 2 unit of clothing

So, Canada has a comparative advantage in clothing as its opportunity cost is lower and US has comparative advantage in food as its opportunity cost is lower.

C. No, as the opportunity cost remains same so pattern of trade will remain same. The gains of trade for the U.S. be higher than when the two countries have the same labor force as more goods can be traded.