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The Boston/Chicago Sock Market: Example of Intercity Trade

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The following table describes the production possibilities of two
cities in the country of Baseballia:

Production per worker per hour:
Red socks White socks
-------------------------------------------------------------------------------
Boston 3 3
Chicago 2 1

a) Without trade, what is the price of white socks in terms of red
socks in Boston? What is the price in Chicago?

b) Which city has an absolute advantage in the production of each color
sock? Which city has a comparative advantage in the production of each
color sock?

c) If the cities trade with each other, which color sock will each
export?

d) What is the range of prices at which trade can occur?

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Solution Summary

Given production data for the production of red socks and white socks in Boston and Chicago, this solution shows how to calculate comparative advantage and predict the direction of trade between the cities. The answer is surprising.

Solution Preview

a) In Boston, 3 white socks cost 3 red socks, so 1 white sock costs 1 red sock. In Chicago, 1 white sock costs 2 red socks.

b) Boston can produce more socks of either color using the same resources (worker hours), so Boston has an absolute advantage in both.
Boston's opportunity cost to produce 1 red sock is 1 white ...

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