Question

Assume that in country A, the unit labor requirement for producing good X is 100 hours, and the unit labor requirement for good Y is 20 hours. Meanwhile in country B, the unit labor requirement for producing good X is 80 hours and the unit labor requirement for good Y is 40 hours. Draw a Production possibilities curve for both countries (2 graphs, one for each country), given the above data. Show and explain how international trade could leave both countries better off than without any trade. Explain.

Answer 1

Hours required

	Country A	Country B
X	100 hours	80 hours
Y	20 hours	40 hours

Let us assume both countries have 400 million labor hours a month.

Output

	Country A	Country B
X	4 million	5 million
Y	20 million	10 million

Now calculating the opportunity cost

Opportunity Cost

	Country A	Country B
X	5 unit of Y	2 unit of Y
Y	0.2 unit of X	0.5 unit of X

Country A has comparative advantage in producing good Y.

Country B has comparative advantage in producing good X.

Refer the attached picture for PPF of the two countries

For country B refer the attached picture

When the two countries wish to trade as they have comparative advantage in one of the good therefore both will get benefitted through trade.

	Country A		Country B
Without trade	X	Y	X	Y
Produced	2	10	2.5	5
Consumed	2	10	2.5	5
Specialization
Produced	0	20	5	0
Trade	Import 2	Export 5	Export 2	Import 5
Consumed	2	15	3	5
Gain from trade	0	+ 5	+0.5	0

As we can see with trade both the countries get better off.

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