2018-ECO3ITR-Assignment-S2.pdf (1, 2) a format as per details in the LMS Questio
ID: 2330056 • Letter: 2
Question
2018-ECO3ITR-Assignment-S2.pdf (1, 2) a format as per details in the LMS Question 1: Absolute and Comparative Advantage (5 marks) Consider the following hypothetical situation, described in the table, showing unit labour require- ments 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? Foreign gain from the same trade? Why? Foreign gain from the same trade? b. How much will Home gain if it trades 5 units of butter for 3 units of cloth? How much would c. How much will Home gain if it trades 5 units of butter for 6 units of cloth? How much wouldExplanation / Answer
Answering.........
a. In Butter Home have an absolute abvantage.Becose in home Cloth required 5 time more labour comaparative Butter
And in Cloth Forign have an absolute advantage. Becose in forign Butter required 3 time more labour comaparative Cloth
b. If home trade 5 units of Butter for 3 units of cloth than it get gain of2 hours. Because 5 units of butter take only 1 hour (5*1/5), where 3 units of cloth take 3 hour (3*1). So net gain wiil be 2 hours.
And if forign trade 5 units of butter for 3 units of cloth than it get loss of 4 hours. Becose 5 units of butter take 5 hours (5*1), where 3 units of cloth take 1 hour (3*1/3). So net loss will be 4 hours.
c. If home trade 5 units of Butter for 6 units of cloth than it get gain of 5 hours. Because 5 units of butter take only 1 hour (5*1/5), where 6 units of cloth take 6 hour (6*1). So net gain wiil be 5 hours.
And if forign trade 5 units of butter for 6 units of cloth than it get loss of 3 hours. Becose 5 units of butter take 5 hours (5*1), where 3 units of cloth take 2 hour (6*1/3). So net loss will be 4 hours.
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