Global Economic Analysis Question
1. Suppose that each worker in the Home country produces three computer or two TVs, and that each worker in the Foreign country produces two computers or three TVs. Assume that each country has four workers.
a) In which good does Home have absolute advantage? Foreign?
b) Graph the production possibility frontiers (PPF) for both Home and Foreign countries. (Please, let the amount of computers produced be measured on the horizontal axis.)
c) What is the slope of PPF at Home? At Foreign?
d) In which goods do Home and Foreign have comparative advantages, respectively?
Suppose that, with international trade, the world relative price of computers is determined at (Pc/Ptv)^w = 1, where Pc is the pice of computers and Ptv is the price of TVs.
On your answer at (b) indicate a point (B) at which the production of Home occurs. Do the same work for Foreign.
e) For each country, draw a line starting at point B in (d) and with a slope equal to the negative of world relative price of computers. Does each country gain from trade? Explain why or why not.