Question

6 England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can 5. produce 40 scones per hour or 2 sweaters per hour. a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage? England? Explain. gain from trade? Would England still gain from trade? Explain. b. If England and Scotland decide to trade, which commodity will Scotland export to c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still

Answer 1

5. Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

English workers are able to produce more scones per hour so England has an absolute advantage in the production of scones.

Scottish workers can produce more sweaters and thus Scotland has an absolute advantage in the production of sweaters.

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

England;

1 sweater = 50 scones

Opportunity cost of producing 1 sweater is 50 scones.

Scotland;

2 sweater = 40 scones

1 sweater = 40/2 = 20 scones

Opportunity cost of producing 1 sweater is 20 scones.

Scotland has comparative advantage in the production of sweaters because of lower opportunity cost. England has comparative advantage in the production of scones.

b) Scotland will export that good to England in which it has comparative advantage. So, Scotland will export sweaters to England.

c) If Scottish workers could produce 1 sweater then opportunity cost of 1 sweater becomes 40 scones. This shows Scotland has comparative advantage in the production of sweater because England has higher opportunity cost to produce 1 sweater.

In this case, Scotland would export sweater while England would export scones and both gains from trade.