England and Scotland both produces scones and sweaters. Suppose that an English worker can produce 30 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.

a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

b. If England and Scotland decide to trade, which commodity will Scotland trade to England? Explain.

c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade

A. Scotland - Comparative Advantage in Scones, Sweaters. England - Comparative Advantage in Scones, Scotland - Comparative Advantage in Sweaters

B. England sell Scones, Scotland sell Sweaters

C. Yes, it would still be gainful for England

Explanation:

Scones Sweaters Trade off (Scones:Sweaters)

England 30 1 30:1

Scotland 40 2 20:1

a. Scotland has absolute advantage in both Scones & Sweaters, as - it can produce more of both goods than England. (scones 40 > 30) (sweaters 2 >1)

b. England has comparative advantage in Scones, Scotland in Sweaters, as - Scotland has less opportunity cost of sweaters in terms of Scones sacrifised (20 20X)

c. Yes, England still gains from trade if Scotland produces 1sweater / hour, as It might get exchange ratio better than domestic trade off ratio. Getting >30, scones per one sweater is anyways gainful trade term for England