Situation: Brazil and Chile can produce cloth and wheat. In Chile, the labor requirement for a...

Situation: Brazil and Chile can produce cloth and wheat. In Chile, the labor requirement for a yard of cloth is 6 hours while the requirement for a bushel of wheat is 9 hours. In Brazil, the requirement for a yard of cloth is 6 hours while that for a bushel of wheat is 10 hours.

Question: Suppose the unit labor requirement for wheat in Brazil falls to 6 hours per bushel. Would this productivity improvement in Brazil impact the pattern of trade (i.e., who imports and exports what)?

Expert Solution

Before change in the unit labor requirement,
Opportunity cost of 1 yard of cloth in Brazil = Labor requirement for cloth/Labor requirement for wheat = 6/10 = 0.6 bushel of wheat
Opportunity cost of 1 yard of cloth in Chile = Labor requirement for cloth/Labor requirement for wheat = 6/9 = 0.67 bushel of wheat

So, Brazil has comparative advantage in cloth as it has lower opportunity cost. Thus, Brazil will export cloth and Chile will import cloth.

Opportunity cost of 1 bushel of wheat in Brazil = Labor requirement for wheat/Labor requirement for cloth = 10/6 = 1.67 yard of cloth
Opportunity cost of 1 bushel of wheat in Chile = Labor requirement for wheat/Labor requirement for cloth = 9/6 = 1.5 yard of cloth
So, Chile has comparative advantage in wheat as it has lower opportunity cost. Thus, Chile will export wheat and Brazil will import wheat.

After change in the unit labor requirement,
Opportunity cost of 1 yard of cloth in Brazil = Labor requirement for cloth/Labor requirement for wheat = 6/6 = 1 bushel of wheat
Opportunity cost of 1 yard of cloth in Chile = Labor requirement for cloth/Labor requirement for wheat = 6/9 = 0.67 bushel of wheat

So, Chile has comparative advantage in cloth as it has lower opportunity cost. Thus, Chile will export cloth and Brazil will import cloth.

Opportunity cost of 1 bushel of wheat in Brazil = Labor requirement for wheat/Labor requirement for cloth = 6/6 = 1 yard of cloth
Opportunity cost of 1 bushel of wheat in Chile = Labor requirement for wheat/Labor requirement for cloth = 9/6 = 1.5 yard of cloth
So, Brazil has comparative advantage in wheat as it has lower opportunity cost. Thus, Brazil will export wheat and Chile will import wheat.

So, after the change in unit labor requirement, the trade pattern reverses.
Brazil: Exports - Wheat; Imports - Cloth
Chile: Exports - Cloth; Imports - Wheat

Rahul Sunny answered 1 year ago

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