Question

England and Scotland both produce scones and jumpers. Suppose that an English worker can produce 50 scones per hour or one jumper per hour. Suppose that a Scottish worker can produce 40 scones per hour or two jumpers per hour.

(a) Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

(b) If England and Scotland decide to trade, which commodity will Scotland trade to England? Explain.

(c) If a Scottish worker could produce only one jumper per hour, would Scotland still gain from trade?

(d) Would England still gain from trade? Explain.

(e) Under what circumstances would England and Scotland not benefit from trade? Explain.

Answer 1

a) England has an absolute advantage in production of scones (higher productivity) while Scotland has an absolute advantage in production of jumpers.

Opportunity cost (England) 1 jumper = 50 scones

Opportunity cost (Scotland) 1 jumper = 40/2 = 20 scones

Scotland has comparative advantage in jumpers while England has comparative advantage in scones (lower opportunity costs)

b) Scotland would export Jumpers to England (comparative advantage in the good)

c) Yes, Scotland would still gain from trade because opportunity cost of 1 jumper = 40 scones < England's opportunity cost = 50 scones.(Comparative advantage still exists)

d) Yes, England would also gain from trade as gains would be shared through trade.

e) Benefits would cease to exist when opportunity costs for both countries become the same.