Does any country have an absolute advantage in both goods/ Econometrics
England and Scotland both produce scones and sweaters. Suppose England can produce 50 scones per hour or 1 sweater per hour. Suppose Scotland can produce 40 scones per hour or 2 sweaters per hour. Before trade England produces 25 scones and 0.5 (one half) sweaters per hour. Scotland produces 20 scones and 1 sweater per hour.
a) Draw the PPF for each (put same goods on same axes for each country and connect them with a straight line). Label your diagram appropriately.
b) Does any country have an absolute advantage in both goods? Explain.
c) Identify which country has comp advantage in each good. Show your reasoning and show all computations.
d) Who should specialize in each good if trade is to occur between each country? Explain your reasoning
e) Explain the potential range of prices possible that would allow mutually beneficial trade.
f) Suppose that the countries choose to trade at a price of 35 scones for one sweater. Show the outcome after trade on your PPF and explain whether it is possible that each country is better after trade and why.
