Question

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for 1 year; and

if she attempted to make the wine, it might require the labour of 120 men for the same time. . . .To produce the

wine in Portugal, might require only the labour of 80 men for 1 year, and to produce the cloth in the same

country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to

export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity

imported by Portugal could be produced there with less labour than in England.

Suppose that the amount of labor he describes can produce 1,000 yards of cloth or 1,000

bottles of wine in either country. Then answer the following questions:

a. What is England’s marginal product of labor in cloth and in wine, and what is

Portugal’s marginal product of labor in cloth and in wine? Which country has

absolute advantage in cloth and in wine, and why?

b. Use the formula PW / PC = MPLC / MPLW to compute the no-trade relative price of

wine in each country. Which country has comparative advantage in wine, and why?

Answer 1

Solution:-

Given that

a)

For England:

Labour required for 1000 yeards of cloth = 100 men

Labor required for 1000 bottles of wine = 120 men

Marginal product of labor for cloth = 1000/100 = 10

Marginal product of labor for wine = 1000/120 = 8.33

For portugal:

Labor required for 1000 yards of cloth = 90 men

Labor required for 1000 bottles of wine = 80 men

Marginal product of labor in cloth = 1000/90 = 11.1

Marginal product of labor of wine = 1000/80 = 12.5

Portugal has absolute advantage in cloth and in wine because Portugal is producing cloth and wine

b)

No trade relative price of wine

where

= price of wine

= price of cloth

= Marginal product of labor for cloth

= Marginal product of labour for wine

For England:

Marginal product of labour for cloth = 10

Marginal product of labour for wine = 8.33

No - trade relative price of wine is given by

No-trade relative price of wine = 1.2

For portugal:

Marginal product of labor for cloth = 11.1

Marginal product of labor for wine = 12.5

No-trade relative price of wine is given by

No-trade relative price of wine = 0.88

England requires 100 men for producing 1000 yards of cloth and 120 men for producing 1000 bottles of wine. So, it is beneficial for England to produce cloth instead of wine.

Portugal requires 90 men for producing 1000 yards of cloth and 80 men for producing 1000 bottles of wine. So, it is beneficial for Portugal to produce wine instead of cloth.

Therefore, Portugal has a comparative advantage in producing wine.

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