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Question: Comparative advantage and trade: Suppose there are two goods in the world, beer and chips. The world consists of four economies: Elbonia, Genovia, Kinakuta, 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 following 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 others 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.

Microeconomics, Economics

  • Category:- Microeconomics
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