Consider the following hypothetical situation, described in the table, showing u

Question

Consider the following hypothetical situation, described in the table, showing unit labour requirements:

Butter Cloth

Home 1/5 (hours) 1 (hours)

Foreign 1 (hours) 1/3 (hours)

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

Explanation / Answer

Answer:- (a) Home has absolute advantage in Butter as it requires less labor hour to produce one unit of butter than Cloth and Foreign country has absolute advantage in Cloth.

(b) To Produce 5 units of Butter Home requires 1 labor hour, and to produce 3 units of Cloths it requires 3 labour hours, So Home will gain 2 units of Clothes.

To Produce 5 units of Butter Foreign country requires 5 labor hour, and to produce 3 units of Cloths it requires 1 labour hours, so Foreign will loose if it produce Butter, but it will gain if it produces Clothes and trade for Butter so it will gain 4 units of Butter.

. (c) To Produce 5 units of Butter Home requires 1 labor hour, and to produce 6 units of Cloths it requires 6 labour hours, So Home will gain 5 units of Clothes by trading Butter for Clothes with Foreign.

To Produce 5 units of Butter Foreign country requires 5 labor hour, and to produce 6 units of Cloths it requires 2 labour hours, so Foreign will loose if it produce Butter, but it will gain if it produces Clothes and trade for Butter so it will gain3 units of Butter.

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