Assignment
Assignment
Assignment
When used to describe international trade, comparative advantage refers to the products
that a country can produce more cheaply or easily than other countries. While this usually
illustrates the benefits of trade, some contemporary economists now acknowledge that
focusing only on comparative advantages can result in exploitation and depletion of the
country's resources.
Both absolute and comparative advantage, help the countries which possess either of those
advantages to increase their total welfare. The trading countries have to trade at the rate of
exchange, which falls within the ratio of their opportunity costs.
Absolute advantage refers to the ability to Comparative advantage refers to the ability
produce more of a good or service using the to produce a good or service at a lower
same amount of resources. opportunity cost.
Absolute advantage refers to the ability to Comparative advantage refers to the ability
produce a good or service at a lower to produce more of a good or service using
opportunity cost. the same amount of resources.
2. Assume two countries the US and UK, two goods corn and textiles. Further
assume that labor is the only relevant input in production and in the pre-
trade situation in each country in the production of one unit of each product.
Accordingly, UK requires 9 and 18 units of labour; while the US requires 6
and 3 units labour to produce one unit of textiles and Corn respectively. Then
a. Which country has an absolute advantage in which product?
b. Indicate which country has a comparative advantage in production of a
certain good.
c. What is the maximum output each country can produce of the good it has a
comparative advantage in? What is the gain from this specialization?
d. Describe the pattern of trade that is possible if both countries enter into a
trade relationship.
e. Assume now, that the labor input requirements are 12 for textiles and 6 for
corn in the UK. Is it possible to define a comparative advantage or say
something about the trade pattern?
3. Home has 1,200 unit of labor available. It can produce two goods, apples and
bananas. The unit labor requirement in apple production is 3, while in banana
production it is 2.
a. Graph Home’s production possibility Frontier.
Graph Home’s production possibility frontier. The production possibility
curve is a straight line that intercepts the apple axis at 400(1,200/3) and the
banana axis at 600 (1,200/2).
4. State the H-O theorem. What is the Leontief paradox in reference to the H-O
theorem?
The Heckscher-Ohlin (H-O) theorem states that a country that is capital abundant will
export the capital-intensive good. Likewise, the country that is labor abundant will export
the labor-intensive good. Each country exports that good that it produces relatively better
than the other country. In this model, a country’s advantage in production arises solely
from its relative factor abundance.
What is the Leontief paradox in reference to the H-O theorem? The Heckscher-Ohlin
theorem gave a generalization that the capital-abundant counties tend to export capital-
intensive goods while labour- abundant countries tend to export the labour- intensive
goods. W.W. Leontief put this generalization to empirical test in 1953 and found the results
that were contrary – to the generalization provided by the H-O theory. Leontief made use
of 1947 input-output tables related to the U.S. economy. 200 groups of industries were
consolidated into 50 sectors, of which 38 traded their products directly on the international
market. He took only two factors of production— labour and capital.
The Stolper-Samuelson theorem demonstrates how changes in output prices affect the
prices of the factors when positive production and zero economic profit are maintained in