ECON 460 – 001, 002 Homework 1 due on January 21, 2011 Question 1: The following table shows the hours of labor required to produce 1 unit of each commodity in each country: Wheat Clothing United States 3 hr 9 hr United Kingdom 4 hr 4 hr a. Which country has an absolute advantage in Wheat? Clothing? Comparative Advantage in Wheat? Clothing? Explain. (8 points) b. If trade takes place between the UK and the US at a barter price of 1clothing for 2 Wheat, why does each country gain from trade? (5 points) c. Let us suppose that UK has 500 hours of labor available 300 of which are used to produce clothing and the remaining 200 to produce wheat. What is the output of each of these goods in autarky? (5 points) d. Let us suppose that UK enters into trade with the US and exports 40 units of Clothing at the above terms of term (1C = 2W), what will be the production, consumption, imports and exports of UK? By how much has the UK been able to increase its consumption of the two goods? (10 points)
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