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International Logistics 3rd Edition by Pierre David,Richard Stewart
Edition 3ISBN: 978-1111464981International Logistics 3rd Edition by Pierre David,Richard Stewart
Edition 3ISBN: 978-1111464981 Exercise 2
Consider two countries' situations: Country A can produce either six automobiles or twelve movies with the same amount of resources. Country B, using the same resources, can produce either five automobiles or eight movies. Using Ricardo's Theory of Comparative Advantage, determine which country would produce automobiles and which would produce movies, and the range of relative prices within which these products would trade.
Explanation
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Given Ricardo's Theory of Comparative Advantage:
The chart below depicts the given production before trading of movies and automobiles for Country A and Country B, along with their combined output.
The chart below depicts the production after trading of movies and automobiles for Country A and Country B, along with their combined output. The relative price for Country A would be 2 movies for 1 automobile. The relative price for Country B would be 1.6 movies for 1 automobile. Given these prices, Country A should create produce more movies and Country B should produce more automobiles.
Therefore Country A would increase in the production of 2 movies while decreasing in the production of 1 automobile. Likewise, Country B would decrease in the production of 1.6 movies and increase in the production of 1 movie.
The chart below depicts the given production before trading of movies and automobiles for Country A and Country B, along with their combined output.
The chart below depicts the production after trading of movies and automobiles for Country A and Country B, along with their combined output. The relative price for Country A would be 2 movies for 1 automobile. The relative price for Country B would be 1.6 movies for 1 automobile. Given these prices, Country A should create produce more movies and Country B should produce more automobiles.Therefore Country A would increase in the production of 2 movies while decreasing in the production of 1 automobile. Likewise, Country B would decrease in the production of 1.6 movies and increase in the production of 1 movie.
International Logistics 3rd Edition by Pierre David,Richard Stewart
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