6. Optional exercise: Consider a world with two goods (beer and tulips). There are two countries (Belgium and the Netherlands) which have identical technologies and preferences. Assume that the production of tulips is relatively labor intensive while the production of beer is relatively capital intensive. Also, assume that in free trade equilibrium, Belgium only produces beer whereas the Netherlands produces both goods. (d) What will be the effect of capital mobility on factor prices in the two countries? (e) If in addition to capital mobility both countries decide to allow for labor mobility, is there going to be migration (of labor)? If yes, in which direction?

Terms of trade Suppose that Greece and Austria both produce oil and wine. Greece’s opportunity cost of producing a bottle of wine is 4 barrels of oil, while Austria’s opportunity cost of producing a bottle of wine is 10 barrels of oil. By comparing the opportunity cost of producing wine in the two countries, you can tell that ______(Greece / Austria) has a comparative advantage in the production of wine, and ______(Greece / Austria) has a comparative advantage in the production of oil.   Suppose that Greece and Austria consider trading wine and oil with each other. Greece can gain from specialization and trade as long as it receives more than _______(1/4barrel / 1/10barrel / 1barrel / 4barrels / 10barrels) of oil for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______(1/4barrel / 1/10barrel / 1barrel / 4barrels / 10barrels) of wine for each barrel of oil it exports to Greece.   Based on answers…

5. The price of trade Suppose that Greece and Austria both produce rye and wine. Greece's opportunity cost of producing a bottle of wine is 5 bushels of rye while Austria's opportunity cost of producing a bottle of wine is 11 bushels of rye. By comparing the opportunity cost of producing wine in the two countries, you can tell that has a comparative advantage in the production of wine and has a comparative advantage in the production of rye. Suppose that Greece and Austria consider trading wine and rye with each other. Greece can gain from specialization and trade as long as it receives more than of rye for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than of wine for each bushel of rye it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of rye) would allow both Austria and Greece to gain from trade? Check all that apply. 2 bushels of rye…

Suppose that France and Italy both produce wine and cheese. France's opportunity cost of producing a case of cheese is 5 barrels of wine, while Italy's opportunity cost of producing a case of cheese is 10 barrels of wine. By comparing the opportunity cost of producing cheese in the two countries, you can tell that comparative advantage in the production of cheese and has a comparative advantage in the production of wine. Suppose that France and Italy consider trading cheese and wine. France can gain from specialization and trade as long as it receives more than of wine for each case of cheese it exports to Italy. Similarly, Italy can gain from trade as long as it receives of cheese for each barrel of wine it exports to France. more than Based on your answer to the last question, a price ratio between benefit both countries. has a barrels of wine per case of cheese will

Argentina has 100 million tons of soybeans and 80 million tons of wheat, Bolivia has 120 million tons of soybeans and 100 million tons of wheat, which of the following does Bolivia have the absolute advantage in production? 1. neither product, 2. soybeans, 3. wheat, 4. wheat and soybeans.

5. The price of trade Suppose that Ireland and Liechtenstein both produce beets and wheat. Ireland's opportunity cost of producing a bushel of wheat is 5 bushels of beets while Liechtenstein's opportunity cost of producing a bushel of wheat is 11 bushels of beets. By comparing the opportunity cost of producing wheat in the two countries, you can tell that Ireland production of wheat and Liechtenstein has a comparative advantage in the production of beets. Suppose that Ireland and Liechtenstein consider trading wheat and beets with each other. Ireland can gain from specialization and trade as long as it receives more than of beets for each bushel of wheat it exports to Liechtenstein. Similarly, Liechtenstein can gain from trade as of wheat for each bushel of beets it exports to Ireland. long as it receives more than Based on your answer to the last question, which of the following prices of trade (that is, price of wheat in terms of beets) would allow both Liechtenstein and Ireland to…

3. Gains from trade Suppose there exist two imaginary countries, Sequoia and Glacier. Their labor forces are each capable of supplying four million hours per day that can be used to produce pistachios, chinos, or some combination of the two. The following table shows the amount of pistachios or chinos that can be produced by one hour of labor. Pistachios Chinos Country (Pounds per hour of labor) (Pairs per hour of labor) Sequoia Glacier 5 8 20 16 Suppose that initially Glacier uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Sequoia uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Sequoia produces 15 million pounds of pistachios and 20 million pairs of chinos, and Glacier produces 8 million pounds of pistachios and 48 million pairs of chinos. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two…

B) Comparative Advantage 1. Country A has 100 workers and Country B has 100 workers. Every worker in Country A can produce 6 tons of wheat per year, or can produce 12 tons of corn per year. Every worker in Country B can produce 2 tons of wheat per year, or can produce 10 tons of corn per year. a. Which country has an absolute advantage in wheat? b. Which country has an absolute advantage in corn? c. Which country has a comparative advantage in wheat? d. Which country has a comparative advantage in corn? Suppose initially the countries do not trade and Country A has 50 workers producing corn and 50 producing wheat. Country B has 30 workers producing corn and 70 producing wheat. Fill out the following table: Country A Country B Corn Produced Wheat Produced Now the two countries trade with one another. e. What good does Country A specialize in? f. What good does Country B specialize in? If these countries have all workers produce the product that their country has a comparative advantage…

4. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Lamponia. Both countries produce lemons and sugar, each initially (that is, before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of sugar, as indicated by grey points (star symbols) labeled point A. SUGAR (Millions of pounds) 48 42 38 30 24 18 PPF 12 8 0 0 8 1 Maldonia 12 18 24 30 36 LEMONS (Millions of pounds) 42 48 ? Maldonia has a comparative advantage in the production of production of advantage), the most the two countries can produce is SUGAR (Millions of pounds) 48 42 36 30 24 18 12 6 0 0 PPF 6 Lamponia A 12 18 24 30 36 42 48 LEMONS (Millions of pounds) ? , while…

3. It has been argued that the Heckscher-Ohlin model defines comparative advantage as the outcome of variances in countries':a. Degree of technological sophisticationb. Relative richness of resourcesc. Labor costsd. Important production activities