Question

Problems: 50 points 1. (10 points) Labor Inputs 100 120 Wheat Clothing Country United States Brazil Answer the following: a. Who has the absolute advantage in which good? b. What is the opportunity cost of wheat in the US? in Brazil? c. What is the opportunity cost of clothing in the US? in Brazil? d. Who has the comparative advantage in which good? e. What are the limits of the post-trade relative price of wheat? Suppose the actual post-trade relative price of wheat to clothing is 3. Who gains from trade? f.

Answer 1

a. The United States has the absolute advantage in both goods. One US worker produces 2 bushels of wheat, compared to the Brazilian worker's one; one US worker produces 8 units of clothing compared to the Brazilian worker's two.

b. The opportunity cost of a bushel of wheat in the US is 4 units of clothing; the opportunity cost of a bushel of wheat in Brazil is only 2 units of clothing. Brazil is therefore the low opportunity cost producer of wheat, and after trade would be expected to specialize in wheat.

c. The opportunity cost of a unit of clothing in the US is 1/4 bushel of wheat; in Brazil it is 1/2 bushel. The US is the low opportunity cost producer of clothing.

d. Comparative advantage goes to the low opportunity cost producer. Brazil has the comparative advantage in wheat and the US in clothing.

e. Autarky price ratios will reflect opportunity costs and therefore Px/Py will be 4 in the US and 2 in Brazil before trade. After trade, the world relative prices will settle somewhere between 2 and 4.