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International Trade and Comparative Advantage

Assume the following output and labor hours for Russia and Germany in producing Wheat and Cloths

Russia Wheat 3 Cloths 6 Labor Hours 100
Germany Wheat 2 Cloths 2 Labor Hours 50

a. Which country has the comparative advantage in wheat?
b. Which country has the comparative advantage in cloth?
c. Which country has the absolute advantage in wheat?
d. Which country has the absolute advantage in cloth?
e. Which good will Russia specialize in?
f. Which good will Germany specialize in?
g. Give the most obvious terms of trade.

Solution Preview

A country has an absolute advantage economically over another, in a particular good, when it can produce that good more efficiently than the other. In this case efficiency will be judged by labor hours.

We can calculate the efficiency of production by dividing the amount of the good produced by how many hours it took to produce it.

Russia: Wheat 3/100 Cloths 6 /100
Germany: Wheat 2/50=4/100 Cloths 2/50 =4/100

Since Germany can produce four grain per 100 hours, but Russian ...

Solution Summary

Determination of the absolute and comparative advantage based on labor hours in two countries.

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