Question

Consider the MPLs of the following countries.

Country         MPL of Wheat                       MPL of Cloths

A (25 people) 6                                2

B (100 People)            3                                1

C (100 People)            1                                1

a. Which country has the absolute advantage over the production of wheat?

b. Which country has the absolute advantage over the production of cloths?

c. Which country has the comparative advantage over the production of wheat?

d. Which country has the comparative advantage over the production of cloth?

e. If only two countries trade at a time, which countries will trade with each other?

Answer 1

The absolute advantage in producing a good implies that the country has highest productivity in producing that particular good.

The total production of both the goods for each country is given in the table below

Countries	Wheat	Cloths
A(25 people)	6*25=150	2*25=50
B(100 people)	3*100=300	1*100=100
C(100 people)	1*100=100	1*100=100

Then country B has highest productivity of wheat and both B and C have highest productivity of clothes.

• Country A has the absolute advantage over the production of wheat.
• Country A has the absolute advantage over the production of clothes.

The opportunity cost table of both the good for each country is given in the table below

Countries	Wheat	Cloths
A(25 people)	2/6=1/3	3
B(100 people)	1/3	3
C(100 people)	1	1

• Country A and B has the comparative advantage over the production of wheat.

• Country C has the comparative advantage over the production of cloth.

• If two country can trade at a time, eithe A and C or B and C will trade with each other because they have comparitive advantage over the production of certain good. But A and B has same opportunity cost and productivity.