You are given the information shown in the table about production relationships in Pugelovia and the rest of the world.

You make several Ricardian assumptions: These are the only two commodities, there are constant ratios of input to output whatever the level of output of rice and cloth, and competition prevails in all markets.

a. Does Pugelovia have an absolute advantage in producing rice? Cloth?

b. Does Pugelovia have a comparative advantage in producing rice? Cloth?

c. If no international trade were allowed, what price ratio would prevail between rice and cloth within Pugelovia?

d. If free international trade is opened up, what are the limits for the equilibrium international price ratio? What product will Pugelovia export? Import?

Transcribed Image Text:

Pugelovia Rest of the world Inputs per Unit of Rice Output 75 50 Inputs per Unit of Cloth Output 100 50