Question

1. Can a country have comparative advantage even though it has an absolute disadvantage?  Make up a numerical example to show this.  

           Someone tells you, “I do not understand how Bangladesh with its low productivity can compete in the world markets at all and even trade with the U.S.  Surely the U.S. is better at producing everything relative to Bangladesh!”

2. Ross Perot, a former presidential candidate, said in 1993 that the introduction of free trade between the U.S. and Mexico, would lead to a “giant sucking sound” as U.S. industry migrated to Mexico attracted by the low wages.  This did not happen.  What was the fallacy in his argument?    Leave this question for now.  We have not done the material.

The following question is chosen from your text.   

3. The table below shows bushels of wheat and the yards of cloth that the United States and the United Kingdom can produce with one hour of labor time under four different hypothetical situations.

	Case A		Case B		Case C		Case D
	US	UK	US	UK	US	UK	US	UK
Wheat (bushels/man-hour)	4	1	4	1	4	1	4	2
Cloth (yards/man-hour)	1	2	3	2	2	2	2	1

a)         In each case identify the commodity in which the United States and the United Kingdom have an absolute advantage or disadvantage.

b)        With respect to the above table indicate in each case the commodity in which each nation has a comparative advantage or disadvantage.

c)         With respect to the above table indicate in each case whether or not trade is possible and the basis for trade.

4. In case B, draw the ppfs of each country with wheat on the y axis and cloth on the x axis.   Show:  

1. The autarky consumption and production points.   What does the slope of the ppf show?
2. Now allow trade.  Choose an international trading price.   What are the boundaries on this?   With this price, show the new production and consumption points in each country.
3. Show the gains from trade.  Shade in the area.   How will you know which country gains more from trade?  

    

Answer 1

a) Absolute Advantage

Case A, the United States has an absolute advantage in wheat(4>1) and the United Kingdom in cloth(2>1).

Case B, the United States has an absolute advantage in both commodities(4>1, 3>2) so that the United Kingdom has an absolute disadvantage.

Case C, the United States has an absolute advantage in wheat(4>2) but has neither an absolute advantage nor disadvantage in cloth. (2=2)

Case D, the United States has an absolute advantage over the United Kingdom in both commodities. (4>2, 2>1)

B) For comparative advantage, we calculate the opportunity cost. The country with a lower opportunity cost in a particular commodity has a comparative advantage. For eg. Case A: US Opportunity cost for Wheat= 1/4 and UK 's 2/1. Therefore US has lower O.C. in wheat and thus a comparative advantage in Wheat.

Case A: The United States has a comparative advantage in wheat(1/4<2) and the United Kingdom in cloth(1/2<4).

In the case of B, the United States has a comparative advantage in wheat(3/4<2) and the United Kingdom in cloth(1/2<4/3).

In the case of C, the United States has a comparative advantage in wheat(2/4<2) and the United Kingdom in cloth (1/2<2).

In the case of D, the United States and the United Kingdom have a comparative advantage in neither commodity as they have an equal opportunity cost in case of wheat (1/2=1/2) and cloth(2=2).

3. A country exports that product in which it has a comparative advantage or absolute advantage.

In case of A, trade is possible based on absolute advantage and comparative advantage both. US exports wheat and UK can export cloth.

In case B, trade is possible based on comparative advantage only. US exports wheat and UK can export cloth.

In case C, trade is possible based on comparative advantage only.US exports wheat and UK can export cloth.

In the case of D, No trade is possible because none has an absolute advantage or comparative advantage in both commodities.