Problem 1: In what ways are the Mercantilists' trade views different from those of Adam Smith's?
Problem 2: Below are the PPS and the TOT for a small open economy. Determine the commodity of its comparative advantage. Explain. The autarky is at point A. Suppose the terms of trade are 1X for 0.25Y.
Suppose the nation decides to devote all of its resources to the production of the commodity of its comparative advantage. Given that the nation decides to consume the same amount of the commodity of its comparative advantage before and after trade, determine the volume of export and import. Determine the amount of consumption gain from trade.
Problem 3: The table below shows units of commodity X and Y that the U.S. and Mexico can produce with one- hour of labor time.
|
Output Per Hour of Labor
|
|
Commodity
|
U.S.
|
Mexico
|
|
X (in units)
|
5
|
20
|
|
Y (in units)
|
30
|
5
|
a. Identify the commodity in which the U.S. and Mexico have a comparative advantage.
b. Suppose that the U.S. exchanges 15Y for 45X with Mexico. What is the TOT for commodity Y? How much would the U.S. and Mexico gain?
Problem 4: Use the table given in the previous question to answer the following questions:
a. Plot the U.S. PPS, given that the total supply of labor in the U.S. is 12 billion hours per unit of time. Measure the good X on the X-axis.
b. Plot the Mexico PPS, given that the total supply of labor in Mexico is 3 billion hours per unit of time. Measure the commodity X on the X-axis.
c. Assume that at the autarky equilibrium the U.S. is producing and consuming 20X and 240 Y and Mexico is producing and consuming 20X and 10Y. Show these points on their PPSs.
d. Assume that trade opens and TOT is 1X for ½Y (or 1Y for 2X). Suppose further that the U.S. decides to consume 340 units of Y and Mexico wants to consume 20X with trade. Determine the production and consumption with trade for each country and their gains from trade. Use your graph.
Problem 5: What is meant by the theory of reciprocal demand? How does it provide a meaningful explanation of the international terms of trade?
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