Question

Paragraph Q4. Hours of Labor Required to Produce S or T Case 1 Case 2 15 12 S 12 T 4 5 10 T 6 1. For each of the cases Show which country has absolute advantage or comparative advantage in goods and T. 2. For each of the cases calculate the Per Unit Gains from Specialization?

Answer 1

1. In Case 1, country A requires less hours of labour to produce both S and T, so it has an absolute advantage in the production of both S and T. But A can produce a unit of S with just 1/3 labour of that required to produce a unit of T. Country B requires 5/4 amount of labour to produce a unit of S as required to produce a unit of T. So, country A has a comparative advantage in producing S but B has a comparative advantage in producing T.

In case 2, country B has an absolute advantage in producing S while country A has an absolute advantage in producing T. Here, A requires 3 times the labour for production of S compated to T, while B requires half the amount of labour in production of S as compared to T. Therefore, B has a comparative advantage in producing S while A has comparative advantage in producing T.

2. In case 1, A will specialize in producing S and B will specialize in producing T. The per unit gain will be the difference between the labour required for producing S and T in each country. The total gain will be 5/4 - 1/3 = 0.916 units of labour saved.

In case 2, A will specialize in producing T and B will specialize in producing S. The labour gains per unit will be 3 - 1/2 = 2.5.