1. Explain the concepts of opportunity cost and comparative advantage and explain how these concepts relate to one another.
2. In the Ricardian model with two countries and two goods, how does trade lead to gains to both countries? (5 marks)
3. Two goods, Guitars (G) and Motorcycles (M), are produced using Labour (L). Consumers like to consume both goods. The marginal product of Labour is constant and the productivities for two countries are presented in the table that follows:
Country A Country B
Guitars/unit labour 15 6
Motorcycles/unit labour 3 2
(a) Which country is more efficient at producing Motorcycles? Which country has a comparative advantage in the production of Motorcycles?
(b) Complete the following table:
(a) Autarky Home PG
PM
A
(b) Autarky Foreign PG
PM
A
(c) Free-trade minimum PG
PM
free-trade
(d) Free-trade maximum w
w
Explain which country will specialize in the production of Motorcycles with free-trade. Explain whether the wage in country will be higher than the wage in another country.