Question

Two countries produce two different items, root beer and cheese. The table below shows the amounts of each commodity that each country can produce with 100 units of factor inputs. Consumption in each country is equal to production – that is, if trade is warranted, citizens need to receive at least as much root beer and cheese as they started with before trade. Given the following production levels, calculate the best possible trading scenario that maximizes global welfare. Remember each country has 600 productive units which they can use in any combination. Before trade, each country has allocated 50% of their productive units to each product. That is, before trade, Hokieland makes 150 gallons of root beer and 60 wheels of cheese. What should each country do if they trade? [be careful, you need to make at least as much after trade as you had before trade.] Explain your solution. Use this example to clearly explain the difference between Absolute and Comparative advantage.

Hokieland   Eagleland

Root Beer   2 units per gallon   4 units per gallon
Cheese   5 units per wheel   8 units per wheel

Answer 1

Pls see table below. The global benefit is expected to be 18.75 gallons extra of root beer.

	Production factor per unit	Current production	Pure Specialization	Specialization maintaining production pre-trade	Global benefit
	Hokieland	Eagleland	Hokieland	Eagleland	Total	Hokieland	Eagleland	Total	Hokieland	Eagleland	Total	Total
Root beer	2	4	150	75	225	300		300	243.75		243.75	18.75
Cheese	5	8	60	37.5	97.5		75	75	22.5	75	97.5	0
Root beer / cheese			2.5	2
Comparative advantage			Root beer	Cheese