Question

Use the information in Table 1 to answer the questions that follows.

$$ \begin{array}{|l|l|l|l|l|l|} \hline \text { Country } & \text { Cloth } & \text { Wine } & \begin{array}{l} \text { Price ratio in } \\ \text { Autarky } \end{array} & \text { Gain in time } & \text { Gain in value } \\ \hline \text { South Africa } & \text { 1hrlyd } & 4 \mathrm{hr} / \mathrm{bbl} & \mathrm{A} & \mathrm{C} & \mathrm{E} \\ \hline \text { Eswatini } & \text { 2hrlyd } & 3 \mathrm{hr} / \mathrm{bbl} & \mathrm{B} & \mathrm{D} & \mathrm{F} \\ \hline \end{array} $$

Assume that the two countries, rather than producing each good for themselves, prefer to exchange at a rate of 1 barrel of wine for 3 yards of cloth \((1 \mathrm{~W}=3 \mathrm{C}) .\)

(a) Complete the required information in the table \((\mathrm{A}, \mathrm{B}, \mathrm{C}, \mathrm{D}, \mathrm{E},\) and \(\mathrm{F})\).

(b) Which country has an absolute advantage in clothing or wine? Briefly explain.

(c) Which country has a comparative advantage in clothing or wine? Briefly explain.

Answer 1

(a)Compute the required information in the table (A, B, C, D, E, and F)

 

Answer

In autarky, relative price ratios are equal to the opportunity cost of production. If a positive amount of both goods are demanded in the market, the cost of purchasing a good must equal the cost to produce the good. Letting South Africa and Eswatini be the same prices ratios as their opportunity cost of production and let us compute for the opportunity cost of each country:

 

Wine

• Computing for both countries opportunity cost for the wine we will also determine the what countries has the comparative advantage of producing wine:

• When Eswatini produces 1 barrel of wine, it will cost labor per barrel of an hour of  ⅔.

• Eswatini has 3 hours in making 1 barrel of wine and 2 hours in making 1 yard of clothing. We can divide both sides by 2 hours to get the cost per barrel. (note* see the given table).

• $\frac{3}{3}=\frac{2}{3}$ hour or 0.67

• Which will equal the opportunity cost of labor of  ⅔ hours in making every 1 barrel of wine.

 

• When South Africa produces 1 barrel of wine, it will give an opportunity cost per barrel of an hour of  ¼ 

• $\frac{4}{4}=\frac{1}{4}$ hour or 0.25

• South Africa has 4 hours in making 1 barrel of wine and 1 hour in making 1 yard of clothing. We can divide both sides by 4 hours to get the cost per barrel. (note* see the given table).

•  We can get this by dividing both sides by 4 hours (note* see the given table).

• Which will equal the opportunity cost of labor of  ¼  hours in making every 1 barrel of wine.

Therefore, we can now determine what countries have the comparative advantage of producing wine; we will look at who has the lowest opportunity cost of labor when making 1 barrel of wine.

• South Africa has the lowest opportunity cost of labor of ¼ hours (0.25) compared to  ⅔ hours (0.67) of Eswatini.

• It means that South Africa is faster and more efficient when making every 1 barrel of wine than Eswatini.

• (c) Thus, South Africa has the Comparative Advantage of producing wine.

 

Clothing

• Computing for both countries opportunity cost for clothing, we will also determine the what countries have the comparative advantage of producing clothing:

• When Eswatini produces 1 yard of clothing, it will cost labor per cloth of 1 hour and ½.

• Eswatini has 2 hours in making 1 yard of clothing and 3 hours in making 1 barrel of wine. We can divide both sides by 2 hours to get the cost per barrel. (note* see the given table).

• $\frac{2}{2}=\frac{3}{2}$ or 1 and ½ hours.

• Which will equal the opportunity cost of labor of  1 and ½ hours in making every 1 yard of clothing.

 

• When South Africa produces 1 barrel of wine, it will give an opportunity cost per barrel of an hour of 4.

• South Africa has 1 hour in making 1 yard of clothing and 4 hours of making 1 barrel of wine. (note* see the given table).

• Which will equal the opportunity cost of labor of 4 hours in making every 1 yard of clothing.

 

Therefore, we can now determine what countries have the comparative advantage of producing clothing; we will look at who has the lowest opportunity cost of labor when creating 1 yard of clothing.

 

• Eswatini has the lowest opportunity cost of labor of 1 hour and ½ (1 hour and 30 minutes) compared to  4 hours of South Africa.

• It means that Eswatini is faster and efficient when making every 1 yard of clothing than South Africa.

• (c) Thus, Eswatini has the Comparative Advantage of producing wine.

 

Price ration in Autarky

 

(A) South Africa Price per barrel of wine          = ¼

South Africa Price per yard of clothing = 4

(B) Eswatini Price per barrel of wine                  = 2/3

Eswatini Price per yard of clothing        = 1 and ½

 

Gain in time

 

(C)  If South Africa trades for 3 yards of clothing in exchange for 1 barrel of wine, South Africa will gain in time of 1 hour.

• Let us see; if South Africa produces 3 yards of clothing (because South Africa is more efficient and faster when making cloth, it will only take 1 hour per yard), it will take 3 hours of making it (3 yards multiply by 1 hour). We will subtract the hours when it makes a 1 barrel of wine, which is 4 hours. 4 hours in making 1 barrel of wine minus 3 hours to make 3 yards of clothing equal to 1 hour. 

• Thus, South Africa will save 1 hour if South Africa is willing to trade.

• Thus, South Africa will gain a value of 1 barrel of wine for each trade.

• *Note, each country is willing to trade, but it should be regarding which its production has a Comparative Advantage.

 

(D)  If Eswatini will trade for 1 barrel of wine in exchange for 3 yards of clothing, Eswatini will gain in time of 3 hours.

• If Eswatini produces 1 barrel of wine (because Eswatini is more efficient and faster when making wine, it will only take 3 hours per barrel), it will take 3 hours of making it (1 barrel multiply by 3 hours). We will subtract the hours when it makes 3 yards of clothing, which is 6 hours (3 yards multiply by 2 hours). 6 hours in making 3 yards of clothing minus 3 hours in making 1 barrel of wine, which will then equal 3 hours. 

• Thus, Eswatini will save 3 hours if Eswatini is willing to trade.

• Thus, Eswatini will gain a value of 3 yards of clothing each trade.

• *Note, each country is willing to trade, but it should be regarding which its production has a Comparative Advantage.

Therefore we have the answer for:

C.   South Africa gain in time is 1 hour.

 

D.  Eswatini gain in time is 3 hours.

1. South Africa gained a value of 1 barrel of wine.

2. Eswatini gained a value of 3 yards of clothing.

(b). For this problem, from the extent of my resources, there will be an absolute advantage only when a producer can produce a good or service in a more significant quantity but still at the same cost or the same quantity at a lower price than the other producers.

• On the given problem, we don't have any situation or additional information that will lead to each country's absolute advantage.

• For example, if there's additional information on South Africa and Eswatini, there is 1 worker for each country. Still, Eswatini has excel more; it produces more at the same cost, or when South Africa has the same quantity produced, but it lowers the cost of its production of cloth by finding more local and inexpensive materials then, it will give an absolute advantage for South Africa.

• Thus, there will be no country that has an absolute advantage.