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In a two-good Ricardian economy, the Home country has 100 units of labor with labor productivity...

In a two-good Ricardian economy, the Home country has 100 units of labor with labor productivity equal to 2 (i.e., each worker can produce 2 units of each good) and the Foreign has 200 units of labor with labor productivity equal to 1 (i.e., each worker can produce 1 unit of each good). Which of the following statements is necessarily true?

Home is labor-abundant.

Foreign is labor-abundant.

Home and Foreign have the same production possibility frontier (PPF).

Home's PPF is different than Foreign's PPF.

Foreign has comparative advantage in both goods.
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Answer #1

Home country has 100 units of labor. Foreign country has 200 units of labor.

Since, foreign country has the greater quantity of labor therefor it is labor-abundant.

Home country posses half the amount of labor in comparison to labor possessed by foreign country. However, labor productivity of home country is double that of the foreign country. This implies that production will be similar in both countries.

Thus, home and foreign have the same production possibility frontier.

Hence, the correct answer is the option (2) and (3).

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