Question

Let’s take a simple example of two countries and two goods. Denmark produces 15 units of Wine in 1 hour and 12 units of cheese in 1 hour. Poland produces 5 units of wine in 1 hour and 6 units of cheese in 1 hour. Based on Ricardo’s theory, who has absolute advantage and who has comparative advantage in Wine and Cheese respectively? Who will export /import which good to/from the other country? Explain your answer adequately

Answer 1

Answer

Country	Wine / hour	Cheese / hour
Denmark	15 units	12 units
Poland	5 units	6 units

From the above table, we see that Denmark produces larger amounts of both wine and chesse per hour than Poland. So, we conclude that Denmark has absolute advantage in the production of both Wine and cheese.

To know the comparative advantage in production we have to find out the opportunity cost of the production of wine and cheese of these two countries.

Opportunity cost of wine = Units of cheese sacrifice / Units of wine gain

Opportunity cost of cheese = Units of wine sacrifice / Units of cheese gain

Country	Wine / hour	Cheese / hour	Opportunity cost of wine	Opportunity cost of cheese
Denmark	15 units	12 units	12 / 15 = 0.8	15 / 12 = 1.25
Poland	5 units	6 units	6 / 5 = 1.2	0.83

From the above table, we see that Denmark has lower opportunity cost in the production of wine than it is in Poland, and, Poland has lower opportunity cost in the production of cheese than it is in Denmark. So, Denmark has comparative advantage in the production of wine and, Poland has comparative advantage in the production of cheese.

From the above analysis, we conclude that Denmark will export wine to Poland and will import cheese from Poland. Poland will export cheese to Denmark and will import wine from Denmanrk.

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