Question

the relative price of a unit of cloth in small isolated country of portlandia is 5 units of food. when the central city of portlandia builds an airstrip, the country is able to engage in trade. if the world relative price of cloth is 3 units of food, which product will portlandia export? which factor of production will mostly benefit from trade?

Answer 1

Relative price in Portlandia : Pc : Pf = 5:1

Relative price in World Pc : Pf = 3:1

Thus when trade starts among world and Portlandia, Portlandia has comparative advantage in Production of food as price, as it has comparative advantage in food production. Though it do not have absolute advantage in food production but we know that comparative advantage is the driving factor in case of international trade. Thus the factor of production which is engaged in food production will be befitted more like land, farmers and pesants.