Summarize the gains from trade in the theory of comparative

Question 1 This table shows the input-output ratios for producing software and books in USA and Ireland.

 

USA

Ireland

Software

20

100

Books

100

20

a. Plot the Production Possibilities Frontiers for both countries. Assume L = 1000 hours.

b. Which country has an absolute advantage in Books? Which country has an absolute advantage in Software? Why?

c. Which country has a comparative advantage in books? Which country has a comparative advantage in software? Why? Is the comparative advantage the same as the absolute advantage? Why or why not?

d. What are the pre-trade relative prices in US and Ireand?

e. Assume one free-trade price ratio. On your diagrams, show and write up an explanation of the autarky and free trade equilibriums for both countries. (No need for exact numbers) Label the trade triangles and write about the information they provide.

f. Does free trade benefit both countries? If yes, explain the gains. If no, explain the losses.

Question 2 Mention whether the following statements are true or false; and explain why you think so.

Please base your answers on the trade theories discussed in class.

a. Under free trade, both countries gain and lose the same amount.

b. In order to save domestic jobs, a country should not have any imports and should increase exports.

c. The Mercantilists did not want any government regulation of trade.

d. A country with a higher labor productivity than another country will have a comparative advantage in the production of all goods.

e. The Theory of Absolute Advantage explains the demand and supply sides of the countries.

Question 3  Given below are the input-output ratios (ai ) for two countries. Which country has a comparative advantage in which good? Why? Explain clearly.
A.

 

U.S.

Brazil

Corn

40

64

Sugar

60

32

B.

 

U.S.

Bhutan

Blankets

55

4

Computers

5

10

C.

 

U.S.

Bahrain

Oil

 

66

3

Peaches

77

30

D.

 

U.S.

Botswana

Flowers

1

50

Diamonds

 

5

250

E.

 

U.S.

Belarus

Natural gas

 

60

50

Airplanes

 

120

2000





Question 4 China Falters, and the Global Economy Is Forced to Adapt (NY Times; 8/27/2015)

Read the article.

a. Explain why the economies of the countries mentioned in the article depend on the Chinese Economy.

b. Calculate the degree of openness for China from 1994-2014, and explain why it has changed over this time. (Give numbers for every year in an excel table; attach it)

Question 5

a. Summarize the gains from trade in the Theory of Comparative Advantage. Explain with a diagram.

b. Why is the Theory of Absolute advantage criticized? How is Theory of Comparative Advantage better?

c. Can comparative advantage be created in a country? Describe how.

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Macroeconomics: Summarize the gains from trade in the theory of comparative
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