USA produces 1 bottle of Wine using 3 units of labor and a Car using 5 units of labor while Japan produces 1 bottle of Wine using 7 units of labor and a Car using 3 units of labor. Based on Ricardian trade theory what should each country do

4.Japan should produce Cars and USA should produce wine.

Explanation:

The Ricardian trade theory is the foundation for Competitive Advantage which espouses that countries should produce and trade goods which they are more efficient at producing.

A country is more efficient at producing a good if it incurs less opportunity costs when doing so.

USA

Cost of producing 1 bottle of wine = 3 /5 = 0.6 cars

Cost of producing 1 car = 5/3 = 1.67 wines

Japan

Cost of producing 1 bottle of wine = 7/3 = 2.33 cars

Cost of producing 1 car = 3/7 = 0.43 wines

The USA has a lower opportunity cost in the production of Wine which means that it is more efficient in it and so it should produce wine.

Japan on the other hand is more efficient in the production of cars so it should produce cars.

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