Week 2 – seminar

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Week 2 - Seminar (questions)

Bu sahifa navigatsiya:

• Inputs per Unit of Rice Output Inputs per Unit of Cloth Output
• Labor Hours per Bottle of Wine Labor Hours per Kilogram of Cheese

In the United States
In the Rest of the World
Productivity:
Units of cloth per labor hour	0.25		1.0
Units of wheat per labor hour	0.5		0.4
Labor hours to make: 1 unit of cloth	4.0		1.0
1 unit of wheat	2.0		2.5

6. 
   Again, consider the numerical example that we used to demonstrate the thinking of Adam Smith (page 34). When these countries open to free trade, is it possible that the free-trade equilibrium world relative price of cloth is 1.5 W/C?
   
7. 
   ^{You are given the information shown in the table about production relationships in} Pugelovia and the rest of the world.
   

	Inputs per Unit of Rice Output	Inputs per Unit of Cloth Output
Pugelovia	75	100
Rest of the world	50	50

You make several Ricardian assumptions: These are the only two commodities, there are constant ratios of input to output whatever the level of output of rice and cloth, and competition prevails in all markets.

1. 
   Does Pugelovia have an absolute advantage in producing rice? Cloth?
   
2. 
   Does Pugelovia have a comparative advantage in producing rice? Cloth?
   
3. 
   If no international trade were allowed, what price ratio would prevail between rice and cloth within Pugelovia?
   
4. 
   If free international trade is opened up, what are the limits for the equilibrium international price ratio? What product will Pugelovia export? Import?
   

8. 
   Consider another Ricardian example, using standard Ricardian assumptions:
   

	Labor Hours per Bottle of Wine	Labor Hours per Kilogram of Cheese
Vintland	15	10
Moonited Republic	10	4

Vintland has 30 million hours of labor in total per year. Moonited Republic has 20 million hours of labor per year.

1. 
   Which country has an absolute advantage in wine? In cheese?
   
2. 
   Which country has a comparative advantage in wine? In cheese?
   
3. 
   Graph each country’s production-possibility curve. Show the no-trade production point for each country, assuming that with no trade Vintland consumes 1.5 million kilos of cheese and Moonited Republic consumes 3 million kilos of cheese.
   
4. 
   When trade is opened, which country exports which good? If the equilibrium international price ratio is ½ bottle of wine per kilo of cheese, what happens to production in each country?
   
5. 
   In this free-trade equilibrium, 2 million kilos of cheese and 1 million bottles of wine are traded. What is the consumption point in each country with free trade? Show this graphically.
   
6. 
   Does each country gain from trade? Explain, referring to your graphs as is appropriate.
   

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