Question 1 - (Comparative Advantage and the Gains from Trade) Use the data in the table below to answer the following questions:
Table 1 - Output per Hour Worked
|
|
Korea
|
China
|
|
Cellular Phones (y-variable)
|
6
|
3
|
|
Computers (x-variables)
|
6
|
9
|
A) Calculate the opportunity cost of a computer in Korea and China, respectively.
B) Identify which country has a comparative advantage in computers and cellular phones, respectively.
C) Suppose that both countries have 10 working hours to produce these two commodities. Draw each country's production possibilities frontier.
D) Assume that the no-trade or autarky point is (30 computers, 30 cellular phones) in Korea and (30 computers, 20 cellular phones) in China. Assume also that with the opening of trade Korea exchanges 20 cellular phones for 30 computers with China. Show graphically for each country the autarky (or no-trade) point of production and consumption, the point of production and consumption with trade, and calculate the gains from trade.
Question 2 - (Heckscher-Ohlin Theory) Given: (1) two nations (1 and 2) which have the same technology but different factor endowments and tastes, (2) two commodities (X and Y) produced under increasing costs conditions, and (3) no transportation costs, tariffs, or other obstructions to trade.
Prove geometrically that mutually advantageous trade between the two nations is possible, by drawing graphs by yourself.
Note: Your answer should show the autarky (no-trade) and free-trade points of production and consumption for each nation, the gains from trade of each nation, and express the equilibrium condition that should prevail when trade stops expanding.