Ricardian model of trade Consider the table below. It shows the number of kilos of coffee or tea that Laura and Suzie can produce in 10 hours of work.                    ...

Ricardian model of trade

Consider the table below. It shows the number of kilos of coffee or tea that Laura and Suzie can produce in 10 hours of work.
 

                  Coffee                Tea

Suzie            10kg               20kg         

Laura             5kg               30kg
 
Which of the following statements is true?

i) Suzie has the comparative advantage in producing coffee; Laura has the absolute advantage in producing coffee.

ii) Suzie has the comparative advantage in producing both goods.

iii) Suzie has the comparative advantage in producing tea and Laura the comparative advantage in producing coffee.

iv) Laura has the absolute advantage in producing both goods

Or,

v) None of the above statements are true

Asked on by xyzmax1

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mathsworkmusic | (Level 2) Educator

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Two people, Suzie and Laura, producing two products, coffee and tea, with possible potential for gains in trade between them - this question relates to the question where there is a potential gain in trade between the two ladies (see first reference link below), in contrast to the question where there is not a potential gain in trade (see second reference link below).

In this version of the scenario, Suzie specialises in producing coffee and Laura in producing tea, as Suzie has the comparative advantage in producing coffee, whereas Laura has the comparative advantage in producing tea. This follows the Ricardian model of trade.

Laura has the comparative advantage in producing tea as her opportunity cost incurred in terms of tea when making a unit of coffee is

O(L,x) = MPL(L,y)/MPL(L,x) = 30/5 = 6

This is greater than Suzie's equivalent opportunity cost, O(S,x) = 2 and therefore Laura has the comparative advantage in producing tea. The complementary situation, where O(S,y) > O(L,y) is true for coffee, so that Suzie specialises in making coffee. For a perfect trade model, one must be specialising in one product, and the other in the other.

The absolute advantage in comparison to the comparative advantage, is when either person produces more of goods x or y in unit time (here 10hrs).

So which of the statements in the question are true?

We know from the other similar question posted (and from the above), that Suzie has the comparative advantage in making coffee and Laura the comparative advantage in making tea, so that rules out ii) and iii).

In terms of absolute advantage, Suzie can produce more coffee than Laura in unit time (10hrs) - 10kg versus 5kg. Conversely, Laura can produce more tea than Suzie in unit time - 30kg versus 20kg. Therefore, Suzie has the absolute advantage in coffee production, whereas Laura has the absolute advantage in tea production. This fact rules out statements i) and iv), leaving only v)

The answer is v) none of the above. In fact, Suzie has the comparative and absolute advantage in making coffee, whereas Laura has the comparative and absolute advantage in making tea. Note that, in general, it need not necessarily be the case that each trading individual (or country) have the absolute advantage in producing the product they have the comparative advantage in producing. Here, Laura could produce 15kg of tea in unit time (less than Suzie's 20kg), but still have the comparative advantage in producing tea, as O(L,x)= 3 would still be greater than O(S,x) = 2.

Sources:

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