International Trade: Absolute and Comparative Advantage, Ricardian Model

Running Head: INTERNATIONAL TRADE
International Trade
Name of the Student
Name of the University
Course ID

1INTERNATIONAL TRADE
Table of Contents
Answer 1: Absolute and Comparative advantage............................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................2
Answer c......................................................................................................................................3
Answer c......................................................................................................................................3
Answer 2: The Ricardian model......................................................................................................3
Answer a......................................................................................................................................3
Answer b......................................................................................................................................5
Answer c......................................................................................................................................6
Answer 3: The Ricardian model....................................................................................................10
Answer a....................................................................................................................................10
Answer b....................................................................................................................................11
Answer c....................................................................................................................................13
Answer d....................................................................................................................................13
Answer e....................................................................................................................................13
References......................................................................................................................................15

2INTERNATIONAL TRADE
Answer 1: Absolute and Comparative advantage
Answer a
In order produce 1 unit of butter Home country requires 1/5 hours of labor while foreign
country requires 1 hours of labor for the same. As home country requires lesser labor hours to
produce butter, home country has an absolute advantage in producing butter (Feenstra 2015). For
cloth, home country requires 1 hours of labor to produce 1 unit. For producing same, foreign
country requires 1/3 hours of labor. Therefore, foreign is able to produce cloth with a lesser labor
hour. Foreign country thus enjoys an absolute advantage in production of cloth.
Answer b
Home has an absolute advantage in producing butter while foreign has an absolute
advantage in production of cloth. Therefore, going by the theory of absolute advantage, home
should specialize and export butter while foreign should specialize and export cloth (Helpman
and Razin 2014). In order to produce 5 units of butter, home requires to use (1/5 * 5) = 1 hours
of labor. Production of 3 units of cloth in home country would require (1*3) = 3 hours of labor.
Home country thus saves (3 – 1) = 2 hours of labor. Using this 2 hours of labor Home country
could produce additional (2*5) = 10 units of butter. Home country thus gain 2 hours of labor or
additional 10 units of butter by involving in trade of 5 units of butter in exchange of 3 units of
cloth.
For Foreign country, production of 3 units of cloth requires (1/3*3) = 1 hours of labor.
Production of 5 units of butter requires (1*5) = 5 hours of labor. Foreign thus saves (5 – 1) = 4
hours of labor. Using this 4 hours of labor, Foreign country can produce (4*3) = 12 units of

3INTERNATIONAL TRADE
cloth. Foreign country thus gains 4 hours of labor or 12 units of cloth for involving in such
exchange relation (Leamer and Stern 2017).
Answer c
Home uses 1/5 hours of labor to produce 1 unit of butter. Therefore, to produce 5 units of
butter home spends (1/5*5) = 1 hour of labor. Home needs to spend 1 hour of labor to produce 1
unit of cloth. In order to produce 6 units of cloth Home therefore needs to use 6 hours of labor.
However, by involving in trade with Foreign, Home country can get 6 units of labor by using
only 1-hour labor instead of instead of spending 6 hours of labor (Schachter 2017). Home
country thus saves (6 – 1) = 5 hours of labor. Home country can use this 5 hours of labor to
produce butter in which it has an absolute advantage (Chacholiades 2017). This 5 hours of labor
can be used to produce (5*5) = 25 units of butter. The gain to Home country thus can be measure
in terms of 5 hours of labor or 25 units of butter.
Foreign use 1/3 hours of labor to produce 1 unit of cloth. 6 units of cloth production in Foreign
country thus requires 2 hours of labor. To produce 1 unit of butter Foreign country needs 1 hour
of labor. Production of 5 units of butter thus require use of (1*5) = 5 hours of labor. By involving
in the exchange relation, foreign country thus can get 5 units of butter by spending only 2 hours
of labor instead of 5 hours of labor. Foreign country thus saves (5 – 2) = 3 hours of labor. The 3
hours of labor thus can be used to produce additional (3*3) = 9 units of labor. The gain to foreign
country thus can be expressed as 3 hours of labor or additional 9 units of cloths (Krugman,
Obstfeld and Melit 2015).
Answer c
Answer 2: The Ricardian model