International Trade and Protectionism: Question 2
Syllabus 6.1
Verdania and Kestria are the only two countries that produce Textiles and Machinery. Each country has exactly one worker-day of labour available, and that worker-day can be used to produce Textiles or Machinery, but not both at once, as shown in Table 1.
Table 1: maximum output from one worker-day
| Country | Textiles (units) | Machinery (units) |
|---|---|---|
| Verdania | 60 | 20 |
| Kestria | 30 | 15 |
(a) Using Table 1, state which country (if either) has an absolute advantage in producing Textiles, and which country (if either) has an absolute advantage in producing Machinery. Explain your answer. [2]
(b) Calculate the opportunity cost of producing one unit of Machinery, in terms of Textiles given up, in each country. Show your working. [3]
(c) Using your answer to part (b), determine which country has the comparative advantage in producing Machinery. Explain why total combined output of Textiles and Machinery can rise if Verdania specialises in Textiles and Kestria specialises in Machinery, and the two countries trade, even though Verdania has an absolute advantage in producing both goods. [4]
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Worked solution
Part (a): Absolute advantage
Absolute advantage compares raw output from the same amount of resource, here, one worker-day in each country.
- Textiles: Verdania produces 60 units against Kestria’s 30 units, so Verdania has the absolute advantage in Textiles.
- Machinery: Verdania produces 20 units against Kestria’s 15 units, so Verdania has the absolute advantage in Machinery too.
So Verdania has an absolute advantage in both goods. It is more productive than Kestria at making either good with one worker-day of labour.
Part (b): Opportunity cost of Machinery in each country
The opportunity cost of producing one extra unit of Machinery is the quantity of Textiles that a worker-day could instead have produced:
For Verdania:
For Kestria:
So producing one more unit of Machinery costs Verdania 3 units of Textiles, but it costs Kestria only 2 units of Textiles.
Part (c): Comparative advantage and the gains from specialisation
Comparing the two opportunity costs of Machinery, Kestria’s opportunity cost (2 Textiles) is lower than Verdania’s (3 Textiles), so Kestria has the comparative advantage in Machinery. It sacrifices relatively less Textiles output to produce Machinery than Verdania does.
Because comparative advantage is always relative between the two goods, Verdania must then have the comparative advantage in Textiles. This can be checked directly: the opportunity cost of one unit of Textiles is Machinery output divided by Textiles output, giving Verdania of a unit of Machinery, against Kestria’s of a unit of Machinery. Since , Verdania does indeed give up less Machinery per unit of Textiles, confirming Verdania’s comparative advantage in Textiles.
Even though Verdania is absolutely more productive at making everything, total combined output of the two goods can still rise if each country specialises according to comparative, not absolute, advantage: Verdania should devote its worker-day fully to Textiles (where its opportunity cost is lowest for Verdania) and Kestria should devote its worker-day fully to Machinery (where its opportunity cost is lowest for Kestria). Resources are then being used in each country wherever they are relatively most efficient, so specialisation followed by trade lets both countries end up with more of both goods than either could produce alone, the central insight of the theory of comparative advantage.
Final answers
- (a) Verdania has the absolute advantage in both Textiles (60 > 30) and Machinery (20 > 15).
- (b) Opportunity cost of 1 unit of Machinery: Verdania 3 Textiles; Kestria 2 Textiles.
- (c) Kestria has the comparative advantage in Machinery (lower opportunity cost, 2 < 3); Verdania has the comparative advantage in Textiles; specialising by comparative advantage and trading raises total output because each worker-day is used where its opportunity cost is lowest.