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Difficulty: Very hardTheories of International Trade (Absolute and Comparative Advantage)

The table below shows the input requirement in labor-hours to produce one unit of Cassava and one unit of Rubber in Country X and Country Y:

CountryCassava (1 unit)Rubber (1 unit)
Country X6 labor-hours18 labor-hours
Country Y10 labor-hours15 labor-hours

Based on David Ricardo's theory of comparative advantage, what is the maximum number of units of Cassava that Country X would be willing to pay to import 11 unit of Rubber from Country Y?

Answer: 3 units of Cassava

Answer

3 units of Cassava (or 3)
To find the maximum amount of Cassava that Country X is willing to pay for 11 unit of Rubber, we determine Country X's domestic opportunity cost of producing Rubber. In Country X, producing 11 unit of Rubber requires 1818 labor-hours, while 11 unit of Cassava requires 66 labor-hours. By sacrificing 11 unit of Rubber, Country X frees up 1818 labor-hours, which could produce 186=3\frac{18}{6} = 3 units of Cassava. Hence, Country X will never pay more than 33 units of Cassava for 11 unit of Rubber in international trade.

Step-by-Step Solution

1
Calculate the domestic opportunity cost of Rubber for Country X using input data.
Opportunity cost of 11 unit of Rubber = Labor-hours for RubberLabor-hours for Cassava=186=3\frac{\text{Labor-hours for Rubber}}{\text{Labor-hours for Cassava}} = \frac{18}{6} = 3 units of Cassava.
In an input-based trade model (labor-hours), the opportunity cost of a commodity is the ratio of labor-hours required for that commodity over the labor-hours required for the alternative commodity.
2
Determine Country X's maximum willing payment (upper bound terms of trade) for importing Rubber.
Maximum price = 33 units of Cassava.
Country X will only import Rubber if the terms of trade are strictly less than or equal to its own domestic opportunity cost of producing Rubber (33 units of Cassava).

Key Concept

Terms of Trade Upper Bound in Comparative Advantage (Input Model)
Estimated Time:2m 0s
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Theories of International Trade (Absolute and Comparative Advantage)

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