Consider a Ricardian framework with two countries, A and B, and two products, G1 and G2. The following table shows the labour requirement (in hours) for the production of G1 and G2 in both countries. G1 G2Country A 20 XCountry B Y 20After the two countries opened up to trade with each other, the relative price of G1 increased in country A.Which one of the following independent scenarios is inconsistent with this pattern of trade? Group of answer choicesX>10 & Y>30X>50 & Y>10X>20 & Y>40X>10 & Y>50
Question
Consider a Ricardian framework with two countries, A and B, and two products, G1 and G2. The following table shows the labour requirement (in hours) for the production of G1 and G2 in both countries. G1 G2Country A 20 XCountry B Y 20After the two countries opened up to trade with each other, the relative price of G1 increased in country A.Which one of the following independent scenarios is inconsistent with this pattern of trade? Group of answer choicesX>10 & Y>30X>50 & Y>10X>20 & Y>40X>10 & Y>50
Solution
In a Ricardian framework, countries will specialize in producing and exporting the good in which they have a comparative advantage, i.e., the good they can produce at a lower opportunity cost. The opportunity cost is calculated as the amount of one good that must be given up to produce one unit of another good.
If the relative price of G1 increased in Country A after opening up to trade, it suggests that Country A is importing G1 and exporting G2. This implies that Country A has a comparative advantage in producing G2, and thus the opportunity cost of producing G2 in Country A (X) should be less than the opportunity cost of producing G2 in Country B (20).
Let's analyze each scenario:
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X>10 & Y>30: In this case, the opportunity cost of producing G2 in Country A is greater than in Country B, which is inconsistent with the pattern of trade.
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X>50 & Y>10: In this case, the opportunity cost of producing G2 in Country A is greater than in Country B, which is inconsistent with the pattern of trade.
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X>20 & Y>40: In this case, the opportunity cost of producing G2 in Country A is greater than in Country B, which is inconsistent with the pattern of trade.
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X>10 & Y>50: In this case, the opportunity cost of producing G2 in Country A is less than in Country B, which is consistent with the pattern of trade.
Therefore, the scenario "X>10 & Y>50" is inconsistent with the pattern of trade.
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