Answer to Question #157964 in Macroeconomics for Jasmine

Question

 Assume that country S and T hire 2,000 unit of labour. Each country use 50% from the labour for production of agriculture goods (A) and manufacturing goods (M). Total production as shown in the following table: Country/Goods(milli on unit) Good A Good M Country S 100 400 Country T 200 500 

1) Assume that both countries agree to trade after specialization in production by using a comparative advantage. Ratio of exchange is 1A: 40M. After trade country S will use 100 unit of good A. Using this information show in the table the effect after trade for the consumption of good A and M in country S and T. 

Answer 1

Good A Good M

Country S 100 400

Country T 200 500

1) Country S will produce 400 units of M, country T will produce 200 units of A.

If ratio of exchange is 1A:4M, and after trade country S will buy and use 100 units of good A, then country S will consume 100 units of good A only, and country T will consume 100 units of good A and 400 units of good M.