Assume that in country A, the unit labor requirement for producing good X is 100 hours, and the unit labor requirement for good Y is 20 hours. Meanwhile in country B, the unit labor requirement for producing good X is 80 hours and the unit labor requirement for good Y is 40 hours. Answer the following:

1. Explain which country has an absolute advantage in each good.
2. Explain which country has a comparative advantage in each good.
3. Under the Theory of Comparative Advantage, explain the trade pattern between these countries.
4. Draw a Production possibilities curve for both countries (2 graphs, one for each country), given the above data. Show and explain how international trade could leave both countries better off than without any trade. Explain.

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Absolute Advantage Country A has an absolute advantage in producing both goods X and Y because it requires fewer hours of labor to produce each good c... View the full answer