Two countries produce two different items, root beer and cheese.
The table below shows the amounts of each commodity that each country can produce with 100 units of factor inputs.
Consumption in each country is equal to production – that is, if trade is warranted, citizens need to receive at least as much root beer and cheese as they started with before trade.
Given the following production levels, calculate the best possible trading scenario that maximizes global welfare.
Remember each country has 100 productive units which they can use in any combination.
Before trade, each country has allocated 50% of their productive units to each product.
That is, before trade, Hokieland makes 25 gallons of root beer and 10 wheels of cheese.
What should each country do if they trade? [be careful, you need to make at least as much after trade as you had before trade.]
Explain your solution. Use this example to clearly explain the difference between Absolute and Comparative advantage.
Hokieland – 2 units per gallon
Eagleland – 4 units per gallon
Hokieland – 5 units per wheel
Eagleland – 8 units per wheel