EC351 International Trade Class 1

Comparative Advantage and the Ricardian Model

Problem 1

BUTTER CLOTH
HOME 1/5(hrs) 1(hrs)
FOREIGN 1(hrs) 1/3(hrs)

a. In which commodity does Home have an absolute advantage? In which

commodity Foreign have an absolute advantage? Why?

b. How much will Home gain if it trades 5 units of butter for 3 units of
cloth? How much would Foreign gain from the same trade? Why?

c. How much will Home gain if it trades 5 units of butter for 6 units of cloth?
How much would Foreign gain from the same trade?

Problem 2

BICYCLES SKATEBOARDS
HOME 5(hrs) 2(hrs)
FOREIGN 3(hrs) 3(hrs)

HOME has 1000 hours of labour available.

FOREIGN has 1200 hours of labour available.

a. Draw the production possibility frontier for Home and Foreign.

b. In the absence of trade, what is the relative price of bicycles in terms of

skateboards in each country?

c. Draw the world production possibility frontier clearly showing the case of
specialisation in comparative advantage and comparative disadvantage.

d. Trade is said to make each country better off by enlarging the range of
consumption choices available to residents. Compare the consumption
possibilities available to Home and Foreign consumers in the closed economy
and open/trading economy cases. Graph the expanded consumption
opportunities. The relative price of skateboards in terms of bicycles under free
trade is 4/5.