(Answered) Comparative advantage and trade suppose there are two goods

Management Studies

Comparative advantage and trade: Suppose there are two goods in the world, beer and chips. The world consists of four economies: Elbonia, Genovia, Kina- kuta, and Sodor. Labor is the only input into production, and one unit of labor can produce beer and chips in each of these economies according to the fol- lowing table:

Country Bottles of beer Bags of chips

Elbonia 5 5

Genovia 5 10

Kinakuta 10 5

Sodor 10 10

(a) Prices are expressed in units of bags of chips, so the price of a bag of chips is 1. What is the price of a bottle of beer in each economy when there is no trade?

(b) Now suppose we let two countries trade with each other (keeping the oth- ers closed). There are six possible trading pairs: EG (Elbonia-Genovia), GK (Genovia-Kinakuta), KS, EK, GS, and ES. For each case, explain who exports beer and who exports chips, and why.

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