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. Which country has the absolute advantage in the production of each good?

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

c. 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?

d. Which country has the comparative advantage in the production of each good? Why?

e. 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.

f. 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.

g. 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