Question

Ricardian Model Suppose US (N) and Mexico (S) both can produce soccer balls (SB) and footballs (FB). The unit labor requirements for soccer balls and footballs in the US and Mexico are: a N SB = 10; a N FB = 2; a S SB = 10; a S FB = 10

• Which country has the absolute advantage in producing football? Which country has the comparative advantage in producing football?

• Us the law of Comparative Advantage to predict the Trade Patterns between US and Mexico.

• Suppose the US has 100 workers. Draw the PPF for US. (label the slope and intercepts) (Use the quanity of Football as the X-axis)

• What’s the autarkic relative price p N FB p N SB in the US? What’s the autarkic relative price p S FB p S SB in Mexico? Please give your reasons.

Answer 1

1) ABSOLUTE ADVANTAGE -US(N) has the absolute advantage in producing fotball, beacuse it take 2 labor inputs to produce the fotball as in Mexico(S) required 10 labor inputs to produce the same.

2) COMPARATIVE ADVANTAGE

• N(SB) comparative advantage is. 2
• N(FB) comparative advantage is 5
• S(SB) comparative advantage is 1
• S(FB) comparative advantage is 1

Hence it is clear that Mexico has the comparative advantage in producing fotball because of lesser opportunity cost as compared to US.

so, US has the absolute advantage in producing fotball and Mexico has the comparative advantage in producing fotball.