Question

Ricardian Model of Trade –

                                    Consider the following 2 X 2 Ricardian model of trade:

	Output per labour-hour
Nation	Wheat (metric tonnes)	Cloth (metres)
Canada	6	4
U.K.	1	3

1. Who has the absolute advantage in wheat? Explain. ( 2 marks)

Canada, because it can produce more wheat

2. Who has the absolute advantage in cloth? Explain.    ( 2 marks)

Canada. It can produce more cloth.

3. Who has the comparative advantage in wheat? Explain ( 2.5 marks)

Canada - 6/4 = 1.5 cloth U.K. 1/3 = 0.33 cloth thus, UK has comparative advantage in wheat as its opportunity cost is lower.

4. Who has the comparative advantage in cloth? Explain. ( 2.5 marks)

Canada has comparative advantage in cloth, as its opportunity cost is lower.

5. What are the “gains” to Canada and the U.K. if they exchange 6 metric tonnes of wheat for 6 metres of cloth? Express the gains in quantities of goods and labour-hours. ( 3 marks)

From your answer in part (e), one country appears to gain more. Which country and why? (3 marks)

Answer 1

Sol :

a.) Absolute Advantage means the advanatge that the country have in production of the goods with the same resources.

Absolute advantage in wheat : CANADA

(As, Canada is producing 6 units of wheat )

b.) Absoulte advanatge in Cloth : CANADA

(As, Canada is producing 4 units of cloth which is greater than the UK )

c.) Comparitive Advantage means the advantage that the country have in producing the goods at less cost than other country.

Comparitive Advanatge in Wheat : CANADA

Because opportunity cost for UK = 3 cloth for 1 wheat

Opportunity cost for Canada = 4 cloth for 6 wheat

= 4/6 = 0.67

(Since, opportunity cost for wheat of Canada is less than UK , Canada has comparative advantage)

d.) Comparative advantage in Cloth : UK

Opportunity cost of UK = 1 wheat for 3 cloth

= 1/3 = 0.33

Opportunity cost for Canada = 6 wheat for 4 cloth

= 6/4 = 1.25

(UK has less opportunity cost for cloth as compared to Canada. )

(Note : As per the policy , we have to solve only 4 subparts of the question )