Question 1
A). Assume that Country X and Country Y use only labour to produce two goods: food and clothes. To produce one unit of food, Country X uses 1 labour hour and Country Y uses 5 labour hours. To produce one unit of clothes, Country X uses 2 labour hours and Country Y uses 6 labour hours.
(i) Find out the absolute advantage and comparative advantage of the two countries.
(ii) What is the direction of trade between the two countries? (ii) If the terms of trade are set at one unit of food for 0.6 units of clothes, what is the gain from trade of Country X and Y in terms of time saved in producing one unit of food and one unit of clothes?
(iii) If the terms of trade are set at one unit of food for 2 units of clothes, will there be any trading equilibrium between the two countries? Explain.
B)) Despite a country has absolute advantage in producing agricultural products, the citizens in the country still want to be professionals like doctors and engineers, not farmers; so the trade theory is unrealistic. Comment the statement.