# Consider two countries Portugal (Home) and England (Foreign, denoted by *) and two goods: Cheese (C) and Wine (W). Consider the information given below: Qc=Qc(Lc)=(1/aLc)Lc ;...

Consider two countries Portugal (Home) and England (Foreign, denoted by *) and two goods: Cheese (C) and Wine (W). Consider the information given below:

Qc=Qc(Lc)=(1/aLc)Lc ; Qw= Qw(Lw)=(1/aLw)Lw

aLw=2 ; aLc=1 ; L=3000

a*Lw=3 ; a*Lc=6 ; L*=6000

ii. What is the relative price of C in terms of W in autarky in the two countries?

iii. In which good does each country have a comparative advantage and why?

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gsenviro | Certified Educator

Given, Qc = (1/aLc)Lc and Qw = (1/aLw)Lw

where, aL denotes unit labor requirements, L denotes total labor supply and Q is the demand.

For cheese: Qc = 3000/1 = 3000 and Qc* = 6000/6 = 1000

For Wine: Qw = 3000/2 = 1500 and Qw* = 6000/3 = 2000

Under autarky:

Home (Portugal): Qc = 3000, Qw = 1500.

i.e., opportunity cost of 1 unit Cheese  = 1500/3000 = 0.5 unit Wine

Foreign (England): Qc* = 1000 and Qw* = 2000

i.e., opportunity cost of 1 unit cheese = 2000/1000= 2 unit Wine.

So, in Portugal, we can generate 1 unit cheese for every 0.5 unit Wine, while in England, we can generate 1 unit Cheese for 2 units of Wine. or in other words, in Autarky, in Portugal cheese costs half as much as wine and in England, Cheese costs twice as much as wine.