Question

Identify comparative advantage, choose the international price which is benetie countries and identify the amount of international trade, if country A is w ial for both a, illing to trade 15 pieces of its good. Demonstrate gains from trade using PPF curve (units: unit labor requirements) a) 1 food 3 cloth b) 1 food 6 cloth c) 1 food8 cloth d) 1 food 1 cloth Country A produces: Cloth: 100 Food: 100 Country B produces: Cloth: 50 Food: 10

Answer 1

	Country A	Country B
Cloth	100	50
Food	100	10

We can determine the comparative advantage by determining the opportunity cost refer the below table

Opportunity Cost

	Country A	Country B
1 unit of Cloth	1 unit of Food	0.2 unit of Food
1 unit of Food	1 unit of Cloth	5 unit of Cloth

Country A has lower opportunity cost of producing food. So, country A has comparative advantage in producing Food.

Country B has lower opportunity cost in producing cloth. So Country B has comparative advantage in producing Cloth.

Country A will be ready to trade for any amount greater than 1 unit of Cloth. If the exchange rate is less than 1 unit of c loth then A will not trade.

While in case of country B it would be ready to trade for any price less than 5 unit of Cloth.

After specialization output of two countries

After Specialization

	Cloth	Food
Country A	0	100
Country B	50	0
Total	50	100

1. 1 Food = 3 Cloth

After Trade

	Cloth	Food
Country A	45	85
Country B	05	15
Total	50	100

2. 1 Food = 6 Cloth

Country B will not trade at this exchange rate.

3. 1 Food= 8 Cloth

Country B will not trade.

4. 1 Food = 1 Cloth

After Trade

	Cloth	Food
Country A	15	85
Country B	35	15
Total	100	100

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