Question

27. Given the following Ricardo-type table showing the labor input required per unit of put in each of the two industries in each of the two countries Shirts Brandy 5 days 12 days United States France 10 days 6 days If the countries engage in trade at post-trade prices (terms of trade) of 1 shirt 0.5 brandy, then A) France gets all the gains from trade B) the United States gets all the gains from trade C) neither country gains from trade. D) the two countries share equally in the gains from trade. 28. If a nation begins to trade, it will be able to sell (export) the product for which its own relative price is: A) lower than other nations. B) higher than other nations. C) the same as other nations. D) less than 10% of the value of other nations. 29. If a country's relative price of X (compared to Y) in autarky is greater than the same relative prices on the world market, then the country has a comparative advantage in good A) Y; export Y and import X B) Y; export X and import Y C) X; export Y and import X D) X; export X and import Y , and it will 30. You are given the following Classical-type table indicating the number of days of labor input needed to make one unit of output of each of the five commodities in each of the two countries. Assume that the wage rate in England is £20 per day, that the wage rate in Portugal is 40 euros per day, and that the fixed exchange rate is £1 3 euros. Good A Good B Good C Good D Good E England Portugal 1 day 4 days 2 days 2 days 1 day 2 days 4 days 5 days 5 days 1 day With the given information, what will be the trade pattern if the two countries engage in trade? A) England will export good A and import goods B, C, D, and E B) England will export goods A, B, and E and import goods C and D. C) England will export goods A, B, D, and E and import good C. D) England will export goods A andD and import goods B, C, and E Page 6.

Answer 1

27. It takes 10 days of labour to produce one unit of shirt in US whereas only 6 days in France. Therefore France is efficient in producing shirts. On the other hand, it takes only 5 days of labour to produce one unit of brandy in US whereas 12 days in France. Therefore US is efficient in producing shirts.

Following are the ratios

	Shirts	Brandy
USA	1	0.5
France	0.5	1

France will produce shirts and trade it with US in exchange of Brandy in the ratio of 1 : 0.5

In this case, both countries will share equal gains from trade. Hence the correct option is D.

28. A country will export a product for which it has a higher comparitive advantage. If the price it is offering in the international market is lower than the other nations, its exports will flourish.  Hence the correct option is A.

29. If the country is getting good X cheaper in the international market as opposed to producing it, it will import the good and export the cheaper one.  Hence the correct option is A.

30. As we know that the classical theory states that the countries have an absolute advantage rather than comparitive. In the aboe table it is clear that England has an absolute advantage over all the goods except Good C. Therefore it will export Good A, B, D and E and import good C from Portugal. Hence the correct option is C.