Consider two countries, the United Kingdom (UK) and Portugal. The two commodities that each country can produce are cloth (C) and wine (W). The only factor of production is Labor. The following table shows how many yards of cloth and how many gallons of wine one worker from each country can produce.

Wine Cloth 3 Portugal United Kingdom 1/2 Let us assume that the UK has 300 workers and Portugal has 100 workers. Also assume that consumers in both countries have Leontief preferences, consuming wine and cloth in a fixed proportion of one-to-one.

1 Which country has a comparative advantage in which good?

2 Autarky: Draw the production possibilities frontier for each country with W on the horizontal axis. How many units of W and C will be produced and consumed in each country? Draw the relative supply of wine (W/C) curve for each country. Draw the relative demand for the wine curve. What is the autarky equilibrium relative price of wine in each country?

3  Trade: Now draw the world relative supply of wine curve. What can you say about the trade equilibrium relative price of wine? How many units of W and C are produced and consumed in each country? Calculate exports and imports for each country. Does each country gain from trade? Explain your answer.

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1 Which country has a comparative advantage in which good The UK has a comparative advantage in clot... View the full answer