Question

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce at most 40 scones per day or at most 2 sweaters per day. Suppose that a Scottish worker can produce at most 20 scones per day or at most 4 sweaters per day.

a. Find the opportunity cost of producing one scone in terms of sweaters for each country. In other words, how many sweaters each country gives up to produce one scone?

b. Without trade, we assume each country produces and consumes both goods. More precisely, both countries spend half of a day on producing scones, and the other half of a day on producing sweaters. How many scones and sweaters can each country produce? Find the total (world) amount of scones and sweaters produced.

c. If England and Scotland decide to trade, which commodity will England specialize in? Which commodity will Scotland specialize in? Explain what would be the pattern of trade. For example, you can explain which commodity will England and Scotland export, respectively.

d. When each country specializes in following own comparative advantage, find the total (world) amount of scones and sweaters produced. Compare the amount you find here to the one without trade in part c. How much does the total output increase or decrease?

Answer 1

a)

For England, a worker can produce at most 40 scones per day or at most 2 sweaters per day

Therefore opportunity to produce one scone = 2 sweater/40 scones=0.05 sweater

Hence for an English worker,to make 1 scone,0.05 sweater is to be foregone.

For Scotland, a worker can produce at most 20 scones per day or at most 4 sweaters per day.

Therefore opportunity to produce one scone = 4 sweater/20 scones=0.2 sweater

Hence for an Scottish worker,to make 1 scone,0.2 sweater is to be foregone.

b)

If we assume that each country produces and consumes both goods. This means both countries spend half of a day on producing scones, and the other half of a day on producing sweaters.

A English worker produces at most 40 scones per day or at most 2 sweaters per day. Therefore he can produce 20 scone in half and 1 sweater in other half.

Same way a Scottish worker produces at most 20 scones per day or at most 4 sweaters per day. Therefore he can produce 10 scone in half and 2 sweater in other half.

Hence total number of Scones produced in the world in a day is 30(20+10) and total number of sweater produced in the world in a day is 3(1+2)

c)

England has an absolute advantagin producing scones as England can produce more number of scones with given output as compared to Scotland and a comparative advantage in producing Scones,because the opportunity cost of producing Scones is 0.05 sweater which is less compared as compared to Scotland whose opportunity cost of producing one scone is 0.2 sweater.

while Scotland has an absolute advantage in producing sweater as Scotland can produce more number of sweater with given output as compared to England and comparative advantage in producing sweater because the opportunity cost of producing Sweater is 5 scones sweater which is less compared as compared to England whose opportunity cost of producing one sweater is 20 scones

Hence England will export Scones and import sweater while Scotland will export sweater and import scones.

d)

Since both countries are to produce according to comparative advantage, England has a comparative advantage in producing scones while Scotland has comparative advantage in producing sweater so both these countries will produce accordingly

As given,English worker can produce 40 scones in a day while Scottish worker can produce 4 sweaters in a day.

This will increase the output as compared if countries produce both goods in house which as shown in part b)