Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of coal and 1 hour of labor to produce a bushel of wheat. Suppose that the international price of coal is 4 1/4 bushels of wheat per ton of coal. Which country is likely to have the larger gain from trade?
A) Poland
B) the Czech Republic
C) Neither country has the larger gain.
D) Both countries have the larger gain.

Question

Quizplus · Accepted Answer

To determine which country has the larger gain from trade, we need to compare their domestic opportunity costs of producing coal and wheat with the international price ratio of coal and wheat (4 1/4 bushels of wheat per ton of coal).

Poland:
- Opportunity cost of producing 1 ton of coal = 4 hours of labor = 4 bushels of wheat
- Opportunity cost of producing 1 bushel of wheat = 1 hour of labor
- Domestic price ratio of coal and wheat = 4:1
- International price ratio of coal and wheat = 4 1/4 : 1 = 17 : 4

Since the domestic price ratio of coal and wheat in Poland (4:1) does not match the international price ratio (17:4), Poland will specialize in producing wheat and exporting it to earn more wheat for each ton of coal it trades. This will lead to an increase in Poland's overall welfare.

Czech Republic:
- Opportunity cost of producing 1 ton of coal = 6 hours of labor = 6 bushels of wheat
- Opportunity cost of producing 1 bushel of wheat = 1 hour of labor
- Domestic price ratio of coal and wheat = 6:1
- International price ratio of coal and wheat = 4 1/4 : 1 = 17 : 4

Like Poland, the Czech Republic will also specialize in producing wheat and exporting it to earn more wheat for each ton of coal it trades. However, since the Czech Republic has a higher opportunity cost of producing coal (6 bushels of wheat) compared to Poland (4 bushels of wheat), it will have a larger gain from trade in terms of opportunity cost savings.

Therefore, the Czech Republic is likely to have the larger gain from trade.

Poland Requires 4 Hours of Labor to Produce 1 Ton