Assume there are only two countries and there is only one factor of production, labor. It takes 4 labor hours to produce 1 pound of salt, and 1 labor hour to produce 1 pound of pepper in Japan. It takes 8 labor hours to produce 1 pound of salt and 4 labor hours to produce 1 pound of pepper in France.

1.  Which country has an absolute advantage in the production of pepper?

a.  Japan
b.  France
c.  Both countries have an absolute advantage in pepper
d.  Neither country has an absolute advantage in pepper

2.  Which country has a comparative advantage in the production of pepper?

a.  Japan
b.  France
c.  Both countries have a comparative advantage in pepper
d.  Neither country has a comparative advantage in pepper

Now assume there are 1000 labor hours available in each country and these hours are divided equally between producing salt and pepper. Therefore, there are 500 labor hours available for producing salt and 500 labor hours for producing pepper in both countries. So before specialization and trade, total world production of salt and pepper is 187.5 pounds and 625 pounds respectively. France specializes in producing salt and exports 30 pounds of salt to Japan (so total production of salt in France becomes 92.5 pounds). With a trading ratio of 3 pounds of pepper to 1 pound of salt, Japan specializes in pepper and exports 90 pound of pepper to France (so total production of pepper in Japan becomes 590).

3.  What is total world production of salt and pepper after specialization and trade?

a.  200 pounds of salt and 700 pounds of pepper
b.  190.5 pounds of salt and 690 pounds of pepper
c.  195 pounds of salt and 655 pounds of pepper
d.  200.5 pounds of salt and 630.5 pounds of pepper
 

Answers:

1.  (a)
2.  (a)
3.  (c)