Question

mQuestion 16 0 12.5 pts U.S. UK Wheat 126 12 Cloth 6 18 The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour). According to the classical theory of trade, which of the following is true? The United States will gain more from trade than the United Kingdom. (WRONG) There is no basis for trade between these countries. The United States has an absolute advantage in the production of cloth. The United States has an absolute advantage in the production of wheat.

Answer 1

The U.S. produces 12 bushels of wheat per hour while the U.K produces only 6 bushels of wheat per hour.

Therefore, the U.S. has an absolute advantage in the production of wheat.

The U.K. produces 18 yards of cloth per hour while the U.S. produces only 6 yards of cloth per hour

Therefore, the U.K. has an absolute advantage in the production of cloth

For the U.S.,

the opportunity cost of producing 1 bushel of wheat = 6 yards/12 = 0.5 yards of cloth

the opportunity cost of producing 1 yard of cloth = 12 bushels/6 = 2 bushels of wheat

For the U.K.,

the opportunity cost of producing 1 bushel of wheat = 18 yards/6 = 3 yards of cloth

the opportunity cost of producing 1 yard of cloth = 6 bushels/18 = 0.33 bushels of wheat

The opportunity cost of producing wheat is lower for the U.S => The U.S has a comparative advantage in producing wheat

The opportunity cost of producing cloth is lower for the U.K => The U.K has a comparative advantage in producing cloth

Therefore, through specialization and trade, both countries can gain. However, the quantum of gain through trade can be determined only through the terms of trade and hence can't be commented upon.

Ans: The United States has an absolute advantage in the production of wheat