ECS3702- International Trade
Assignment 02 Solution
Distinction guaranteed
Due 06 September 2024
Compiled by Ranga
Coly.muneri@gmail.com
Question 1
i. Cellphones: Unos has an absolute advantage in producing cellphones because it produces
more (18 tons/hr) compared to Tres (6 tons/hr).
Candles: Tres has an absolute advantage in producing candles because it produces more (8
tons/hr) compared to Unos (6 tons/hr).
Conversely, Tres has an absolute disadvantage in producing cellphones, and Unos has an
absolute disadvantage in producing candles.
ii. According to the theory of absolute advantage, trade is beneficial when each country or
entity specializes in the production of goods for which it has an absolute advantage. By
doing so, both entities can trade these goods and end up with more than they would have
been able to produce on their own.
Unos should specialize in producing cellphones, where it has an absolute advantage (18
tons/hr vs. 6 tons/hr).
Tres should specialize in producing candles, where it has an absolute advantage (8 tons/hr
vs. 6 tons/hr).
Unos can produce more cellphones efficiently and trade some of them with Tres in
exchange for candles. Tres can produce more candles efficiently and trade some of them
with Unos in exchange for cellphones.Trade is possible and beneficial between Unos and
Tres. Unos should export cellphones and import candles, while Tres should export candles
and import cellphones, following the pattern outlined by the theory of absolute advantage.
iii. Calculating opportunity cost
Opportunity cost Unos Tres
Cellphone (1 ton) 6/18=0.33 tons of candle 8/6=1.33 tons of candles
Candles (1 ton) 18/6=3 tons of cellphones 6/8=0.75 tons of cellphones
, Unos has a comparative advantage in producing cellphones and a comparative
disadvantage in producing candles.
Tres has a comparative advantage in producing candles and a comparative disadvantage in
producing cellphones.
iv. According to the theory of comparative advantage, trade is beneficial when each country
specializes in producing and exporting the goods for which it has a comparative advantage.
This allows both countries to produce more efficiently and benefit from trade by obtaining
goods at a lower opportunity cost than if they tried to produce everything themselves.
Unos has a comparative advantage in producing cellphones (lower opportunity cost of 0.33
tons of candles per ton of cellphones).
Tres has a comparative advantage in producing candles (lower opportunity cost of 0.75
tons of cellphones per ton of candles).
Unos should specialize in the production of cellphones. It can then trade some of its
cellphones to Tres in exchange for candles. Tres should specialize in the production of
candles. It can then trade some of its candles to Unos in exchange for cellphones.By
specializing according to their comparative advantages, both Unos and Tres can increase
their overall production of cellphones and candles. Unos can obtain candles from Tres at a
lower opportunity cost than if it were to produce them domestically. Tres can obtain
cellphones from Unos at a lower opportunity cost than if it were to produce them
domestically. Both nations will be able to consume more of both goods than they would
have been able to without trade, leading to a more efficient allocation of resources.
Trade is not only possible but also mutually beneficial according to the theory of
comparative advantage. Unos should specialize in producing and exporting cellphones
while importing candles from Tres. Conversely, Tres should specialize in producing and
exporting candles while importing cellphones from Unos. This pattern of trade allows both
nations to maximize their production efficiency and improve their overall welfare.
Question 2
i. Unos will have a lower relative price of cellphones because it has an abundance of capital,
which is the key input in the production of cellphones. The availability of capital makes it
cheaper to produce cellphones in Unos, leading to a lower relative price compared to Tres.
Therefore, the relative price of cellphones will be lower in Unos.
ii. .
a) Production of Candles and Cellphones
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