Question

Denmark and Sweden each produce two goods, a beauty product and a household product. Denmark is endowed with 2,000 units of labor, and Sweden is endowed with 1,500 units of labor. The unit labor requirements are given as:

	Denmark	Sweden
Unit Labor Requirement for Beauty Product	aA=0.8	aA=0.5
Unit Labor Requirement for Household Product	aM=0.4	aM=0.15

Which country has a comparative advantage in the production of the beauty & the household product? If these countries were to specialize and engage in trade, which country would produce and export each good?

Answer 1

Sweden has a comparative advantage in the production of the beauty & the household product. It is because Sweden using comparatively less labour in production of both the products than the Denmark. Here is the explanation for this, 0.5÷0.8=0.62 ,it means whatever units of labour is required by Denmark to produce beauty product 62% of that is needed by Sweden. Also incase of Household product, 0.15÷0.4=0.37, it means whatever units of labour is required by Denmark to produce household product 37% of that is needed by Sweden.

If these countries were to specialize and engage in trade, then Sweden will produce and export household product and Denmark will produce and export beauty product. It is so because according to comparative advantage theory, a country should specialize in the production of that commodity in which it has comparative advantage is more since Sweden has more advantage (0.37) in household product than the beauty product(0.67). And a country should specialize in the production of that commodity in which it has less disadvantage since Denmark has less disadvantage in the beauty product than the household product.