Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home's daily production is 20 tons of wheat and 10 tons of corn. Now suppose that Home has the opportunity to trade with Foreign at an international price of 1 ton of wheat per ton of corn. In which product will Home find its comparative advantage?
A) wheat
B) corn
C) Home will find its competitive advantage in neither corn nor wheat.
D) Home will find its competitive advantage in both corn and wheat.

Question

Quizplus · Accepted Answer

Home's opportunity cost for 1 ton of wheat is 0.5 ton of corn (since they can produce 1 ton of wheat or 0.5 ton of corn with a day of labor). Meanwhile, Foreign's opportunity cost for 1 ton of wheat is only 0.25 ton of corn (since they can produce 1 ton of wheat or 0.25 ton of corn with a day of labor). Therefore, Foreign has a comparative advantage in producing corn, and Home has a comparative advantage in producing wheat. As long as the international price of wheat is higher than 0.5 ton of corn per ton of wheat (which it is at 1 ton of wheat per ton of corn), Home will benefit from specializing in producing and exporting wheat while importing corn from Foreign.

Assume That Two Countries (Home and Foreign) Each Produce Two