comparative advantage

comparative advantage - For this reason Portugal will...

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WINE/CLOTH TRADE IN THE INTERNATIONAL MARKET: Cost of Wine / Cost of Cloth = 1/1 United Kingdom Portugal Cost of Cloth 100 90 Production(hours) Cost of Wine 120 80 Production (hours) Opportunity Cost 120/100 = 80/90 = of Making 1 unit 1.2 units of cloth 0.89 units of cloth of Wine Opportunity Cost 100/120 = 90/80 = of Making 1 unit .83 units of wine 1.1 units of wine of Cloth Comparative Advantage CLOTH WINE 1. This means that for UK, the cost of producing Cloth is only 83% the cost of producing wine. And since the selling price of wine = selling price of cloth, England will sell Cloth because it is cheaper to produce. 2. This also means that for Portugal, the cost of producing wine is 89% the cost of producing cloth.
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Unformatted text preview: For this reason Portugal will produce wine. 3. Portugal will trade with England because the cost to them for cloth (1.1 units wine) is higher than the cost of buying wine from England (who sells at the market price of 1 wine for 1 cloth). Intuitatively, Portugal should be using all their resources to produce wine because it is cheaper for them to produce it. In doing so, they will have the money resources to trade for all their cloth consumption needs. 4. England will trade with Portugal because the cost to them of wine (1.2 units of cloth) is more expensive than the world market cost of 1. UK should be producing all cloth so they can buy the wine they desire....
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This note was uploaded on 02/26/2008 for the course ECO 001 taught by Professor Gunter during the Fall '06 term at Lehigh University .

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