Assignment:
Answer all five questions in one file. Each question is worth 20 marks. Keep your answer concise. Use figures to illustrate your point wherever possible. Show all your work and attach your graphs when submitting your assignment for grading and feedback.
1. Define and explain the difference between absolute advantage and comparative advantage. What is the significance of each in international trade processes?
2. Suppose that, from an initial consumer equilibrium position, the price of good X falls while the price of good Y remains the same. Using indifference curve analysis, explain how and why the consumer's relative consumption of the two goods will change.
3. Suppose that the price of labour rises. Explain how producers would respond, using the isocost/isoquant framework. What would happen to the capital/labour ratio?
4. What do you regard as the main weaknesses of the Ricardian/Classical model as an explanation of trade patterns? Why do you regard them as weaknesses?
5. In light of the Ricardian model, how might you evaluate the claim by developing countries that they are at a disadvantage in trade with powerful industrialized nations?