Which country has comparative advantage in wine and why

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Reference no: EM131478712

Question: At the beginning of the chapter, there is a brief quotation from David Ricardo; here is a longer version of what Ricardo wrote:

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England.

Suppose that the amount of labor Ricardo describes can produce 1,000 yards of cloth or 1,000 bottles of wine, in either country. Then answer the following:

a. What is England's marginal product of labor in cloth and in wine, and what is Portugal's marginal product of labor in cloth and in wine? Which country has absolute advantage in cloth, and in wine, and why?

b. Use the formula PW /PC = MPLC /MPLW to compute the no-trade relative price of wine in each country. Which country has comparative advantage in wine, and why?

Reference no: EM131478712

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