a)
To ascertain: The
a)
Explanation of Solution
If there is no trade, the price of wine in terms of cloth in E is = 8/2 = 4 yards of cloth/ barrel of wine.
| Country | Cloth in yards | wine in barrels | Opportunity cost of P in terms of cloth | |
| E | 8 | 2/8 = 0.25 | 2 | 8/2 = 4 |
| P | 12 | 6/12 = 0.5 | 6 | 12/6 = 2 |
b)
To ascertain: The price of wine in terms of cloth in country P.
b)
Explanation of Solution
If there is no trade, the price of wine in terms of cloth in P is = 12/6 = 2 yards of cloth/ barrel of wine.
| Country | Cloth in yards | Opportunity cost of E in terms of wine | wine in barrels | Opportunity cost of P in terms of cloth |
| E | 8 | 2/8 = 0.25 | 2 | 8/2 = 4 |
| P | 12 | 6/12 = 0.5 | 6 | 12/6 = 2 |
c)
To draw: The
c)
Explanation of Solution
The construction of PPF for both the countries is as follows:-
d)
To ascertain: The country that has
d)
Explanation of Solution
| Absolute adv. | Comparative adv. | |
| Wine | P | P |
| Cloth | P | E |
P can produce more of cloth and wine using a week of labour; hence, it has an absolute advantage in both these products. However, the opportunity cost of producing cloth for P is more (6/12) than the same cost in E (2/8). Therefore, P has a comparative advantage in production of wine whereas E has a comparative advantage in production of cloth.
e)
To ascertain: The country that specialize in particular good and exporting the same.
e)
Explanation of Solution
A country which has comparative advantage in production of good should specialize in production of that particular good and trade it with another country for another good.
E should produce cloth and export cloth and import wine from P. P should specialize and export wine for cloth with E.
f)
To ascertain: The price at which the trade should take place.
f)
Explanation of Solution
An offer of 3 yards of cloth/1 barrel of wine is better than P's own production of 2 yards of cloth/1 barrel of wine
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Chapter 18 Solutions
Macroeconomics: Principles and Policy (MindTap Course List)
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