Question

5. Problems and Applications Q5

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 40 scones per hour or 1 sweater per hour.

Suppose that a Scottish worker can produce 20 scones per hour or 2 sweaters per hour.

_______ workers have an absolute advantage in producing scones, and _______ workers have an absolute advantage in producing sweaters.

_______ workers have a comparative advantage in producing scones, and _______ workers have a comparative advantage in producing sweaters.

If England and Scotland decide to trade, Scotland will trade_______ to England.

If a Scottish worker could produce only 1 sweater per hour, Scotland _______ gain from trade, and England_______  gain from trade.

Answer 1

Ans.

	scones	sweater
England	40 per hour	1 per hour
scotland	20 per hour	2 per hour

Absolute advantage: when a country can produce more of a particular good than another country using a certain amount of resources.

1. Here, English workers have an absolute advantage in producing scones and Scottish workers have an absolute advantage in producing sweater.

comparative advantage: when a country can produce a particular good at a lower opportunity cost than another country.

opportunity cost of scones

England - 40s- 1sw= 1s- 0.025sw

Scotland- 20s- 2sw= 1s- 0.1 sw  

opportunity cost of sweater

England- 1sw- 40s= 1sw- 40s

scotland- 2sw- 20s= 2sw- 10s

2. Here, English workers have a comparative advantage in producing scones, and scottish workers have comparative advantage in producing sweaters

on the basis of opportunity cost,

3. if England and Scotland decide to trade, Scotland will trade sweater to England. As Scotland has a comparative advantage in producing a sweater.

4. If Scottish worker could produce only 1 sweater per hour, Scotland receives 10 scones gain from trade and England receives 20 sweater gain from trade.