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ECON 450 International Economics Comparative Advantage & Trade Report

Answer the following questions

NOTE: For full/maximum credit and any figures you produce, you must also clearly label all axis,

lines/curves, and key points and intersections.

1. Clearly define and discuss what a country’s PPF represent. In particular, answer, what does each point on the country’s PPF represent and what does the slope at each point represent? [HINT: they may represent more than one thing].

Use the following information to answer the next 6 questions (2 – 6).

Suppose that each worker in the Home country can produce three cars or two TVs. Suppose that each worker in the Foreign country can produce two cars or three TVs. Assume that Home and Foreign both have six workers. You may also assume constant-marginal-productivity of labor (i.e. the marginal product of each worker is the same regardless of whether they are the first or last worker in the sector).

2. What is the Home country’s MPLTV and MPLCAR?

What is it for the Foreign country?

3. Graph the PPF for the Home country and for the Foreign country (see note above regarding labeling).

4. Compare the two countries.

a. Which country has a comparative advantage in producing Cars, and which has a comparative advantage in producing TVs (is it the same country)? Briefly explain/show why.

b. Which good will each country specialize in producing if they can trade and why (what will consumers do)?

5. If the two countries trade:

a. What are the minimum and maximum “prices” that you expect to see for a car?

b. Propose a relative price that these two countries would both agree to after they opened to allow trade and started specializing in production.

c. Draw a curve representing the free-trade relative-world-price (that you proposed in b.) onto the PPF figures for each country.

6. Assuming the countries agree to the relative price you proposed in 5. b.

a. Propose a trade that both countries would agree to at that relative price.

b. Fill in/complete the following table for the two countries before and after they specialize, and engage in the trade you proposed:

c. Draw the production point (“B”) and consumption point (“C”) for each country, with trade, into the PPF figure for each country.

d. Does each country gain from trade? Briefly explain why or why not (support your answer with the figures you drew or the table you filled out).


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