Skip to content
Sem 5 Prep
← Intl TradeMercantilism and absolute advantage

Formulas for this chapter

Labour hours to produce a quantity

Hours = quantity required / output per labour hour

The base calculation for every gains-from-trade question in this chapter. Always use the productivity of the country you are standing in.

Quantity required
Units of the good to be produced or obtained
Output per labour hour
That country's productivity in that good

Labour-time saving from trade

Saving = (imports / own productivity in the imported good) - (exports / own productivity in the exported good)

When a question states an exchange and asks whether, or by how much, a nation gains. A positive answer for both nations proves the trade is mutually beneficial.

Imports
Quantity of the good received
Exports
Quantity of the good given up
Own productivity
Always the productivity of the nation whose saving you are computing
Step 1 of 20
The ideaTheory

A baker and a builder

A baker can bake in an hour what would take a builder all morning. The builder can put up a wall in a day that the baker could not manage in a week.

Obviously they should each do their own job and swap. Both end the week with more bread and more wall than if each had done everything alone.

Adam Smith said countries are the same. What took a book to argue in 1776 is this paragraph. The next few screens are the exam version.

← BackContinue →