Question

Brazil and Chile can produce cloth and wheat. In Chile, the labor requirement for a yard of cloth is 6 hours while the requirement for a bushel of wheat is 9 hours. In Brazil, the requirement for a yard of cloth is 6 hours while that for a bushel of wheat is 8 hours. a). Which country has absolute advantage in wheat? In cloth? b). What is the opportunity cost of wheat (in terms of units of cloth) in Brazil? In Chile? c). When these countries open to trade, which country will export cloth? d). Is it possible for the wheat-exporting country to charge 12 bushels/yard for its wheat? Explain briefly. e). Suppose the unit labor requirement for wheat in Brazil falls to 6 hours per bushel. Would this productivity improvement in Brazil impact the pattern of trade (i.e., who imports and exports what)?

Answer 1

A)Both countries required 6 Labour hours for cloth,so none has absolute advantage in clothes.

Brazil requies less Labour hour for wheat ,so it has absolute advantage in wheat.

B) Opportunity cost of wheat in Brazil=8/6=4/3=1.33

Opportunity cost of wheat in Chile=9/6=3/2=1.5

C) Lower opportunity cost of wheat in brazil shows Brazil has comparitive advantage in wheat and Chile in cloth.

So Chile will specialize in clothes and export it.

D) Opportunity cost of Chile of clothes=6/9=2/3=0.67

Opportunity cost of Brazil of clothes=6/8=3/4=0.75

So trade will only occurs if Exporting country charge between 0.67 to 0.75 bushels per clothes.so 12 bushels per clothes is not possible.