Question

In UK 3 labor hours and in US 2 labor hours are required to produce one...

In UK 3 labor hours and in US 2 labor hours are required to produce one unit of Textile. In UK 8 labor hours and in US 5 labor hours are required to produce one unit of Auto. Suppose 1000 hours of labor available in US and UK. Construct the production possibility frontiers for US and UK. Calculate the pre-trade ratio. is there any basis of trade? If yes; which commodity should each country export?

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Answer #1

UK can produce 333 units of textile and 125 units of Auto; Similarly USA can produce 500 units of textile and 200 units of Auto.

IF UK produces 1 more unit of auto it has to forgo 2.66 units of Textile whereas US has to forgo 2.5 units of Textile

IF UK produces 1 more unit of textile it has to forgo 0.25 units of Auto whereas US has to forgo 0.4 units of Auto

Hence we can observe that UK has comparative advantage in producing textile (0.25<0.4) whereas US has an advantage in producing Auto(2.5<2.667)

Therfore UK should export textile to USA and USA should export Auto to UK.

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