Question

This exercise uses the example given by David Ricardo in 1817. Consider two countries, England and Portugal, each of which can make two goods, cloth and wine. In England, it takes 100 workers to produce a unit of cloth and 120 workers to produce a unit of wine. In Portugal, it takes 90 workers to produce a unit of cloth and 80 workers to produce a unit of wine. England has 1800 workers while Portugal has 1440 workers. a. Draw the PPF of each country on two separate graphs, with the units of cloth on the horizontal axis and units of wine on the vertical axis. b. Which country has the absolute advantage in cloth? In wine? c. Which country has a comparative advantage in cloth? In wine? d. If the two countries can trade, which country would export cloth and which country export wine? e. What is the range of the price of cloth (in the unit of wine per unit of cloth) under which the countries trade? f. Suppose the price of cloth is 1 unit of wine per unit of cloth, i.e. a unit of cloth can be traded for a unit of wine. Draw the CPF of each country after the trade. g. Continue to assume that countries trade at the price of 1 unit of wine per unit of cloth. If England consumes 10 units of cloth, how many units of wine does it consume? How many units of cloth and wine does Portugal consume? h. For each country, calculate the number of workers required to produce the con- sumption bundle you have found in part (g).

          This exercise uses the example given by David Ricardo in 1817.
Consider two countries, England and Portugal, each of which can make two goods,
cloth and wine. In England, it takes 100 workers to produce a unit of cloth and 120
workers to produce a unit of wine. In Portugal, it takes 90 workers to produce a unit
of cloth and 80 workers to produce a unit of wine. England has 1800 workers while
Portugal has 1440 workers.
a. Draw the PPF of each country on two separate graphs, with the units of cloth on the
horizontal axis and units of wine on the vertical axis.
b. Which country has the absolute advantage in cloth? In wine?
c. Which country has a comparative advantage in cloth? In wine?
d. If the two countries can trade, which country would export cloth and which country
export wine?
e. What is the range of the price of cloth (in the unit of wine per unit of cloth) under
which the countries trade?
f. Suppose the price of cloth is 1 unit of wine per unit of cloth, i.e. a unit of cloth can
be traded for a unit of wine. Draw the CPF of each country after the trade.
g. Continue to assume that countries trade at the price of 1 unit of wine per unit of cloth.
If England consumes 10 units of cloth, how many units of wine does it consume?
How many units of cloth and wine does Portugal consume?
h. For each country, calculate the number of workers required to produce the con-
sumption bundle you have found in part (g).

This exercise uses the example given by David Ricardo in 1817.
Consider two countries, England and Portugal, each of which can make two goods,
cloth and wine. In England, it takes 100 workers to produce a unit of cloth and 120
workers to produce a unit of wine. In Portugal, it takes 90 workers to produce a unit
of cloth and 80 workers to produce a unit of wine. England has 1800 workers while
Portugal has 1440 workers.
a. Draw the PPF of each country on two separate graphs, with the units of cloth on the
horizontal axis and units of wine on the vertical axis.
b. Which country has the absolute advantage in cloth? In wine?
c. Which country has a comparative advantage in cloth? In wine?
d. If the two countries can trade, which country would export cloth and which country
export wine?
e. What is the range of the price of cloth (in the unit of wine per unit of cloth) under
which the countries trade?
f. Suppose the price of cloth is 1 unit of wine per unit of cloth, i.e. a unit of cloth can
be traded for a unit of wine. Draw the CPF of each country after the trade.
g. Continue to assume that countries trade at the price of 1 unit of wine per unit of cloth.
If England consumes 10 units of cloth, how many units of wine does it consume?
How many units of cloth and wine does Portugal consume?
h. For each country, calculate the number of workers required to produce the con-
sumption bundle you have found in part (g).

Added by Scott B.

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