Example 1: (On Adam Smith's Law of Absolute Advantage) The following table shows bushels of wheat and yards of cloth that the U.S. and the U.K. can produce with one hour of labor time under a hypothetical situation: a) Which country has an absolute advantage (or disadvantage) in which commodity? Explain? b) In the case of no trade, what is the domestic exchange ratio in each country? c) If the U.S. exchanges 1W for 1C with the U.K., how much does it gain? d) If the U.S. exchanges 1W for 1C with the U.K., how much does the U.K. gain? e) What is the range for mutually beneficial trade? f) How much would each country gain if they exchange 1W for 2C?

U.S.A U.K

Wheat (bushels/man-hour) 6 1

Cloth (yards/man-hour) 4 5