Country A has 16,000 units of labor and can produce 2 goods, manufactures and fo

Question

Country A has 16,000 units of labor and can produce 2 goods, manufactures and food. A’s producers take 2 units of labor to produce one unit of manufactures and 8 units to produce one unit of food. Country B has 36,000 units of labor and takes 6 units of labor to produce one unit of manufactures and 5 units to produce one unit of food. What is the price of manufactures in terms of food at which A and B would respectively supply manufactures? What would A export in Adam Smith’s world? What is the amount it could supply?

Please answer fully and with good explanation. Not just equation and answer.

Explanation / Answer

Units of labour required for producing 1 unit of

Hence from the table it is clear that country B uses more labour in production of both goods, According to Adam Smith Country A has absolute advantage in producing both goods. In country A labour more efficient then country B.

Country has 16000 unit of labour so it can produce 16000/2= 8000 units of manufacturer

or

16000/8 = 2000 unit of food

While country has 36000 units of labour it can produce 36000/6 = 6000 units of manufacturer

or

36000/5 = 7200 units of food

Although country B is having more units of labour but it is costlier so according to Adam Smith Country A can export manufacturer to country B up to the limit of 8000 units.

Domestic Exchange Rate

Manufacturer 2: 8 Food

1:0.25

Manufacturer 6:5 Food

1: 1.2

Food 8:2 manufacturer

1:4

Food 5:6 manufacturer

1:0.83

According to Smith international Trade require a producer of exports to have an absolute advantage i.e. an exporting country must be able to produce a larger output then rival  so in present illustration country A is having absolute advantage in producing manufacture.

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