Question

Labor use per unit for two products shown below for countries A and B, along with units of each product being produced. Can the two countries benefit from the trade? Who has the competitive advantage with regard to which?

Country A

unit labor shoes 100. computers 500

units produced shoes 1000 computers 10

Country B unit labor shoes 50 computers 200 unit produced shoes 2000 and computers 10

Answer 1

Consider the given problem here there are 2 countries “A” and “B” and there are 2 goods “shoe’s” and “computers”. Now “country A” the “unit labor required to 1 unit of shoe is 100”, “unit labor required to 1 unit of computer is 500”. So, the opportunity cost of producing “shoe” is “100/500=1/5”, => to produce additional 1 unit of “shoe” “country A” have to forgo “1/5” units of computer.

Now “country B” the “unit labor required to 1 unit of shoe is 50”, “unit labor required to 1 unit of computer is 200”. So, the opportunity cost of producing “shoe” is “50/200=1/4”, => to produce additional 1 unit of “shoe” “country B” have to forgo “1/4” units of computer.

So, we can see that “country B” has lower opportunity cost of producing “shoe” compared to “country A”, => “country B” has comparative advantage in the production of “shoe” and “country A” has comparative advantage in the production of “computer”. So, here “country A” will totally specialize towards “computer” and “country B” will totally specialize towards “shoes”.

So, here gain from trade is possible provided each country will totally specialize towards it have comparative advantage and will export exactly the same goods. So, “country A” will only produce and export “computer” and “country B” will only produce and export “shoe”.