Problem
(a) Suppose that, the United Kingdom has 500 hours of labor available to it. Prior to trade, the country is using 300 of those labor hours to produce clothing and the remaining 200 labor hours to produce wheat. How much wheat and how much clothing will the United Kingdom be producing in this pretrade situation? (Because there is no trade, your answers will also indicate the amounts of wheat and clothing consumed in the United Kingdom prior to trade.)
(b) Now suppose that the United Kingdom enters into trade with the United States at the previously indicated barter price of 1 clothing for 2 wheat (or 1 wheat for 1 /2 clothing). The United Kingdom now devotes all of its labor hours to clothing production and hence produces 125 units of clothing and 0 units of wheat. Why is this so? Suppose that the country exports 40C (and therefore receives 80W in exchange) and keeps the remaining 85C for its own consumption. What will be the United Kingdom consumption of wheat and clothing in the trading situation? By how much has the United Kingdom, because of trade, been able to increase its consumption of wheat and its consumption of clothing?