The table below shows units of wheat and cloth produced by each worker per day in both the countries.
Table 20.1

-Refer to Table 20.1. Assume that the U.S. has only two workers and the terms of trade are 2 bushels of wheat per rack of clothing. What would be the gains from trade for the U.S. if it is producing according to its comparative advantage?

Question

The table below shows units of wheat and cloth produced by each worker per day in both the countries.
Table 20.1
 
-Refer to Table 20.1. Assume that the U.S. has only two workers and the terms of trade are 2 bushels of wheat per rack of clothing. What would be the gains from trade for the U.S. if it is producing according to its comparative advantage?

Quizplus · Accepted Answer

If the U.S. produces according to its comparative advantage, it will specialize in producing wheat, as it has a higher productivity in wheat production compared to cloth production.

With two workers, the U.S. can produce 16 bushels of wheat per day (8 bushels per worker) or 2 racks of clothing (1 rack per worker).

If it specializes in producing wheat, then it can produce 32 bushels of wheat per day with both workers.

At the terms of trade of 2 bushels of wheat per rack of clothing, the U.S. can trade 16 bushels of wheat for 8 racks of clothing.

Therefore, the U.S. gains 1.5 racks of clothing (8 racks of clothing received minus 2 racks of clothing produced minus 4 racks of clothing traded for 16 bushels of wheat) from trade.

The Table Below Shows Units of Wheat and Cloth Produced