Reference no: EM1375332
1. Assume that in England five man hours of labor are needed to make each cask of wine and five man-hours are needed to produce each bolt of cloth, whereas in Portugal 1 man-hour of labor is required for a cask of wine and 4 man-hours for a bolt of cloth (Except for the choice of numbers, this is the example used by Ricardo to discuss comparative advantage).
a) Prove that when both countries are producing both goods, the world can be made better off by allowing England and Portugal to reallocate labor and trade in accordance with the patter of comparative advantage.
b) Now suppose that it becomes possible to move labor between the two countries. What should be done?
2. Consider, as in Problem 1, that in England 5 halbor are required for each unit of wine and each unit of cloth, while in Portugal 1 labor produces 1 wine and 4 labor produce 1 cloth. Suppose also that each country has 100 man-hours of labor available.
a) If everyone in the world always consumes exactly one cask of wine for each bolt of cloth, what should each country produce and what should the direction of trade be?
b) In problem (a), what will be traded and what will all prices be? Do both countries gain as a result of trade? By how much? If the world suddenly decides it will consume one cask of wine for every two bolts of cloth, how will your answers change?
3. As in Problem 2, suppose that England has 100 labor and requires 5 to produce each unit of wine and of cloth, whereas Portugal has 100 labor units, with 1 required to produce each wine and 4 to produce each cloth unit. If the world relative price of wine in terms of cloth is 1, what will be the pattern of trade and production; what will be the prices in each country; and who will gain from trade?
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