Question

Suppose two countries have labor inputs as represented in the table below. Based on the information in this table, country B has

Country
	A	B
S	9	4
T	12	3

a.    absolute advantage in the production of both goods.

b.    comparative advantage in the production of both goods.

c.    absolute disadvantage in the production of S.

d.    comparative advantage in the production of S.

4. According to the table, country A has comparative advantage in the production of

a.    good S.

b.    good T.

c.    both goods.

d.    neither good.

5. In this example, the equilibrium terms of trade (P_S/P_T) could occur anywhere

a.    between 3/4 and 5/4

b.    between 3/4 and 4/3

c.    between 1/3 and 4/3

d.    between 1/2 and 3/4

Answer 1

3. d.    comparative advantage in the production of S.

Country A is better than country B in production of both goods (9 vs 4 for production of S, 12 vs 3 for production of T).

According to comparative advantage, there is still a basis for mutually beneficial trade even if a country A has absolute advantange in production of both commodities. It should specialize in production of that commodity where its absolute advantage is greater (this is the commodity of its comparative advantage). Similarly, the other country should specialize in production of commodity where its absolve disadvantage is smaller (this is the commodity of its comparative advantage).

Country B is 2.25 (9/4) times worse than country A in production of S but 4 (12/3) times worse than country A in production of T. Thus Country B has smaller absolute disadvantage in production of S. That is, Country B has comparative advantage in production of S.

4. b.    good T

Country A is 2.25 times better than country B in production of S but 4 times better than country B in production of T. Thus it has absolute advantage in both but comparative advantage in T.

5. b.    between 3/4 and 4/3

Country A will only agree for trade if the terms of trade exceed 3/4 (9/12) since this much it can produce domestically also. Country B will agree for trade only if terms of trade are less than 4/3 since this much it can produce domestically. Thus the mutually beneficial terms of trade will lie in between this range.