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 400 units of factor inputs (productive units). Before trade 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 production in this two-country world. Remember each country has 400 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 100 gallons of root beer and 20 wheels of cheese. Based on the theory of Comparative Advantage, what should each country do if they trade? [be careful, you need to make at least as much of each output after trade as you had before trade.] Explain your solution. Use this example to clearly explain the difference between Absolute and Comparative advantage. Need the Solution.

	Hokieland	Eagleland
Rootbeer	2 Units per gallon	4 units per gallon
Cheese	5 units per wheel	8 units per wheel

Answer 1

Pls see table below for the relevant calculations and the answer. Also please note that Hokieland has absolute advantage in production of both the goods as its cost of production is lower than Eagleland for both, but it has comparative advantage in producing Root Beer and Eagleland has comparative advantage in producing Chees.

	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	100	50	150	200		200	162.5		162.5	12.5
Cheese	5	8	40	25	65		50	50	15	50	65	0
Root beer / cheese			2.5	2
Comparative advantage			Root beer	Cheese