Answers assignment w5

Tutorial 5: International Trade and Currency Market
and Economic Integration - Week 5

Lecture: (10 min)

- Trade Theories: Absolute and Comparative Advantage, Heckscher-Ohlin
Theories

Assignment 1 : Comparative advantage
Refer to the following table.
Number of labor hours to produce 1 unit of output:

Highland Lowland

Widgets 8 10

Gadgets 4 6

a) Determine which country has an absolute advantage in which good.
Table states number of inputs (labor hours used) to produce 1 output so
country which has smaller number is more efficient and has absolute
advantage

In this case, Highland uses lesser inputs for widgets (8<10) and
gadgets (4<6)

b) Identify the good where each country enjoys a comparative
advantage.
Comparative advantage ratios: (across commodities)
Highland : Widgets = 8/4= 2
Gadgets = 4/8 = 0.5
Lowland: Widgets = 10/6 = 1.67
Gadgets = 6/10 = 0.6
Since we are looking inputs used to produce a unit of output,
comparative advantage resides in the country with the smaller
number. Hence, Highland has comparative advantage in Gadgets
(0.5 < 0.6) and Lowland has comparative advantage in Widgets
(1.67<2).

c) Still using the table above, if the hourly wage is 15 quid in Highland
and 10 grand in Lowland and the current exchange rate is 1 quid =
1 grand. Then comparing prices between the two countries, where
are widgets and gadgets cheaper to buy?

Multiply hours in the table by the given wages