Seminar 1

Problem Solving

International Trade Theory

A. Smith and D. Ricardo
Question 05
Use Information for case B above and
assume that
labour is the only factor of production and
is homogeneous.

(a) What is the cost in terms of labour content of

producing wheat and cloth in the US and UK ?
(b) What is the dollar price of wheat and cloth in the
US if
the wage rate is $6 ?
( c) What is the pound price
Production of wheat
possibilities and
in the UScloth
and in
the UK
UK rate
if the wage : is £1 ? Case B Case B
(US) (UK)
Wheat 4 1
(bushels/labour-hour)
Cloth 3 2
(yards/labour-hour)
Production possibilities in the US and
Case B Case B
UK : (US) (UK)
Wheat 4 1
(bushels/labour-hour)
Cloth 3 2
(yards/labour-hour)

Answer
5 (a) In US,
Cost of producing 1 bush of
wheat
(in terms of labour content)
= 1/4 labour hour

Cost of producing 1 yard of

cloth
(in terms of labour content)
= 1/3 labour hour
Production possibilities in the US and
Case B Case B
UK : (US) (UK)
Wheat 4 1
(bushels/labour-hour)
Cloth 3 2
(yards/labour-hour)

Answer
5 (a) In UK,
Cost of producing 1 bush of
wheat
(in terms of labour content)
= 1/1 labour hour
= 1 labour hour

Cost of producing 1 yard of

cloth
(in terms of labour content)
Production possibilities in the US and
Case B Case B
UK : (US) (UK)
Wheat 4 1
(bushels/labour-hour)
Cloth 3 2
(yards/labour-hour)

Answer
5 (b) If the wage rate in US is $6
dollar,
Cost of producing 1 bush of
wheat in US
= $6/4
= $1.5 dollar

Cost of producing 1 yard of

cloth in US
= $6/3
Production possibilities in the US and
Case B Case B
UK : (US) (UK)
Wheat 4 1
(bushels/labour-hour)
Cloth 3 2
(yards/labour-hour)

Answer
5 (c) If the wage rate in UK is £1,
Cost of producing 1 bush of
wheat in UK
= £1/1
= £1

Cost of producing 1 yard of cloth

in UK
= £1/2
= £0.5