Jim Whitney Economics 101

Trade according to comparative advantage

a. The direction of trade

 
Output per hour
Opportunity cost of...
Country
Tons of steel
Bushels of wheat
1 ton of steel
1 bushel of wheat
U.S.
6
60
 10 bushels of wheat 1/10 ton of steel
South Korea
3
6
    
 
Indicate which country has the absolute advantage (greatest output efficiency) in:
    Steel: ____________
    Wheat: ____________

Indicate which country has the comparative advantage (lowest opportunity cost) in:
    Steel: ____________
    Wheat: ____________

If there were trade between these two countries, indicate which country would tend to...
    export steel and import wheat: ____________
    export wheat and import steel: ____________

b. The gains from trade

    Now suppose that that the U.S. and South Korea agree to trade 10 tons of steel for 50 bushels of wheat, and that the U.S. then switches 1 labor hour from steel to wheat and South Korea switches 4 labor hours from wheat to steel.
 

  U.S. South Korea
Steel Wheat Steel Wheat
Production change: -6 +60    
Trade: +10 -50    
Consumption change: +4 +10