Question

Country   OUTPUT PER WORKER

Shoes Pants

Portugal 60 40   

spain 100 50

Question: Identify the goods each country has an absolute advantage/identify the goods each country has a comparative advantage and based on Adam Smith and sepeartley David Ricardo's theories what will the trade patterns be between the two countries and why?

Answer 1

Spain has absolute advantage in both the goods because Spain could produce more of both Shoes and Pants.

Comaparative advantage is calculated by calculating the opportunity costs. Lesser opportunity cost means comparative advantage in that good.

Opportunity cost of Portugal in Pents = 60/40 = 1.5 Shoes.

Opportunity cost of Spain in pents =  100/50 = 2 Shoes.

So here Portugal have lesser opportunity cost in pents it means it have comparative advantage in Pents. And Spain have comparative advantage in Shoes. Portugal will produce 40 Pents and Spain will produce 100 Shoes.

Trading between two countries is decided between the opportunity costs.

Here 1 Pent will be traded with more the 1.5 Shoes and less then 2 shoes.

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