Question 1: Suppose an hour's labour produces 10 kg of rice and 5 meter of cloth in India, and 5 kg and 2 meter in Thailand. Using opportunity costs, explain which country will export cloth and which will export rice in trade?
Question 2: Suppose Mike and Johnson produce two products-hamburgers and T-shirts. Mike produces 10 hamburgers or 3 T-shirts a day and Johnson produces 7 hamburgers or 4 T-shirts. Assuming they can devote time in making either hamburgers or T-shirts
a. Draw the production possibility curve
b. Who enjoys the absolute advantage of producing both?
c. Who has higher opportunity cost of making T-shirts?
d. Who has a comparative advantage in producing hamburgers?
Question 3
Consider two countries (Home and Foreign) that produce goods 1 (with labour and capital) and 2 (with labour and land) according to the production functions listed below (Table 1 and Table 2). Initially, both countries have the same supply of labour (100 units each), capital, and land. The capital stock in Home then grows. This change shifts out both the production curve for good 1 as a function of labour employed (Table 1) and the associated marginal product of labour curve (Table 2). Nothing happens to the production and marginal curves for good 2.
a. Show how the increase in the supply of capital for Home affects its production possibility frontier.
b. On the same graph, draw the relative supply curve for both the Home and the Foreign economy.
c. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)?
d. Describe how opening up to trade affects all free factors (labour, capital, land) in both countries.
|
Table 1
|
|
Labour input to good 1
|
Output of good 1
|
Labour input to Good 2
|
Output of good 2
|
|
0
|
0
|
0
|
0
|
|
10
|
25.1
|
10
|
39.8
|
|
20
|
38.1
|
20
|
52.5
|
|
30
|
48.6
|
30
|
61.8
|
|
40
|
57.7
|
40
|
69.3
|
|
50
|
66
|
50
|
75.8
|
|
60
|
73.6
|
60
|
81.5
|
|
70
|
87
|
70
|
86.7
|
|
80
|
87.4
|
80
|
91.4
|
|
90
|
93.9
|
90
|
95.9
|
|
100
|
100
|
100
|
100
|
|
Table 2
|
|
Workers Employed
|
MPL in sector 1
|
MPL in sector 2
|
|
10
|
1.51
|
1.59
|
|
20
|
1.14
|
1.05
|
|
30
|
1
|
0.82
|
|
40
|
0.87
|
0.69
|
|
50
|
0.78
|
.6
|
|
60
|
0.74
|
0.54
|
|
70
|
0.69
|
0.5
|
|
80
|
0.66
|
0.46
|
|
90
|
0.63
|
0.43
|
|
100
|
0.6
|
0.4
|
Question 4
Answer the following 5 Multiple Choice Questions
1. A country does NOT engage in trade can benefit from trade only if
A) It employs a unique technology
B) Its wage rate is below the world average
C) It has an absolute advantage in at least one good
D) Pre-trade and free-trade relative prices are identical
E) Pre-trade and free-trade relative prices are not identical
2. The effect of trade on specialised employees of exporting industries will be ____ jobs and ____ pay because they are relatively____.
A) fewer, lower, mobile
B) more, higher, mobile
C) more, lower, immobile
D) fewer, lower, immobile
E) more, higher, immobile
3. The Ricardian model of international trade demonstrates that trade can be mutually beneficial. Why, then, do governments restrict imports of some goods?
A) Imports are only restricted when foreign made goods do not meet domestic standard of quality
B) Import restrictions are the results of trade wars between hostile countries
C) Trade can have substantial effects on a country's distribution of income
D) The Ricardian model is often incorrect in its prediction that trade can be mutually beneficial
E) Restriction on Imports are intended to benefit domestic consumers.
4. In the specific factor model, a country's production function is ____ because of ____.
A) a curved line, constant marginal returns
B) a curved line, a limited supply of labour
C) a curved line, diminishing marginal returns
D) a straight line, constant marginal returns
E) a straight line, diminishing marginal returns
5. The effect of trade on income distribution
A) is insignificant in the short run
B) is positive for all segments of an economy
C) can be significant in the short run
D) implies that there are no real gains from trade
E) refutes the model of comparative advantage