Suppose there are two goods, wheat and clothing, and two countries, the United States and Brazil, in the world. The production of wheat and clothing requires only labor. In the United States, it takes 1 unit of labor to produce 4 bushels of wheat and 1 unit of labor to produce 2 items of clothing. In Brazil, it takes 1 unit of labor to produce 1 bushel of wheat and 1 unit of labor to produce 1 item of clothing. Suppose the United States has 100 units of labor and Brazil has 120.
a. Which country has the absolute advantage in each good? Indicate each country's comparative advantage.
b. In what range will the world trading price ratio lie when these countries open up to free trade? Will both country's be better off?
*hint* - a) no hint b) compare pretrade price of wheat in terms of clothing and pretrade price of clothing per unit of wheat
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