PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 16, Problem 2RQ
To determine
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In 2017, Ecuador's biggest export was crude (unprocessed) petroleum, 63% of which it exported to the United States, and
Ecuador's biggest import was refined (processed) petroleum, of which 70% was imported from the United States. What does
this tell you about the countries' comparative advantages in extracting petroleum and refining petroleum?
This information suggests that
has a comparative advantage in refining petroleum, and
the United States
must I
ntage in extracting petroleum.
Ecuador
Q2. Suppose that there are two countries (A and B) and two goods (a labor-intensive good X, textile, and a capital-intensive good Y, electronics). The two countries have identical demand for the two goods but different labor and capital endowments. Suppose (Px/Py)A < (Px/Py)B in autarky.
Identify the capital-abundant country and the labor-abundant country, respectively.
Use a PPF-indifference-curve graph to identify the autarky equilibrium for country B.
In the same graph, show country B's gains from trade when the two countries trade at a level of Px/Py that is between the two countries' autarky price ratios.
In the above graph, identify the trade triangle (including export and import quantities) for country B.
What would be the effect of trade on country B's relative nominal wage rate, i.e., the ratio of nominal wage rate relative to nominal capital rental rate (w/r)? Illustrate your answer graphically.
Your answer:
Assume that the world economy is composed of only two countries (Canada and the United States) and only two goods (steel and
wheat). The table below reports the units of steel or wheat per unit of labor in Canada and in the United States
Steel per
Wheat per
unit of labor
unit of labor
Canada
United States
9.
3
Suppose both the US and Canada have 10 units of labor. Use the joint PPF to answer the following: If the two countries are
producing 25 units of wheat, what is the opportunity cost of wheat? Hint: draw the PPF and ask what is the slope when 25 units are
being produced?
2.5
2.75
3
Chapter 16 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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