Suppose that in a day a worker in the United States can prod

Suppose that in a day a worker in the United States can produce 10 bushels of corn or 2 shirts. In Russia a worker can produce 9 bushels of corn or 3 shirts in one day. Which of the following would benefit both the United States and Russia if trade occurred? Show work.

Solution

Let\'s find out the opportunity costs (OC).

In the US,

OC of corn = 2/10 = 0.2 shirts

OC of shirt = 10/2 = 5 bushels of corn

In Russia,

OC of corn = 3/9 = 0.33 shirts

OC of shirt = 9/3 = 3 bushels of corn

Law od comparative advantage states that two countries will gain from trade if each of them produce that good in which they have comparative advantage. Here, US can produce corn at a lower OC than Russia can (0.2 < 0.33), so US should specialize in and export corn. Russia can produce shirt at a lower OC than US can (3 < 5), so Russia should specialize in & export shirts.