There are two countries, Atlantis and Thule, and two goods, Clothing (C) and food (F) In Atlantis, it takes 3 units of labour to produce a unit of Clothing and 3 units of labour to make a unit of Food. In Thule, a unit of Clothing requires 2 units of labour, and a unit of Food requires 5 units of labour. Assume that Atlantis has 300 units of labour, and Thule has 500 units of labour. (a) What is the opportunity cost of Food in terms of Clothing in each country? (b) Which country has an absolute advantage in which good? (c) Which country has a comparative advantage in which good? Why? (d) Draw the production possibilities frontier for each country (put Food on the horizontal axis). Label axes and slopes. (e) Draw the world production possibilities frontier (assuming labour does not move between countries). Again, put Food on the horizontal axis. Label axes and important points on - 2 - the diagram. (f ) Draw the world relative supply curve (labelled RS) for F/C with the relative price of Food pF /pC on the vertical axis (assuming labour does not move between countries). Label axes and important points on the diagram. (g) On your diagram in (f), draw a Relative Demand curve (labelled RD 1) that yields an equilibrium where each country is specialized in producing the good in which it has a comparative advantage. Which country exports which good? Do they both gain from trade? Why? (h) Redraw the relative supply curve from (f) and now draw a Relative Demand curve (labelled RD 2) that yields an equilibrium where Thule produces both goods and Atlantis is specialized in producing only one good. Which country exports which good? Do they both gain from trade? Why? (i) Suppose that in the free trade equilibrium, p F = 2 and p C = 1. Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. What good would Atlantis export if these were the prices? Would Atlantis gain from trade? Why? (j) Suppose now instead that in the free trade equilibrium, p F = 1 and p C = 1. Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. How is your diagram different from (i)? Why? Is Atlantis better off or worse off at these prices as compared with those in (i)? Why?
There are two countries, Atlantis and Thule, and two goods, Clothing (C) and food (F) In Atlantis, it takes 3 units of labour to produce a unit of Clothing and 3 units of labour to make a unit of Food. In Thule, a unit of Clothing requires 2 units of labour, and a unit of Food requires 5 units of labour. Assume that Atlantis has 300 units of labour, and Thule has 500 units of labour. (a) What is the opportunity cost of Food in terms of Clothing in each country? (b) Which country has an absolute advantage in which good? (c) Which country has a comparative advantage in which good? Why? (d) Draw the production possibilities frontier for each country (put Food on the horizontal axis). Label axes and slopes. (e) Draw the world production possibilities frontier (assuming labour does not move between countries). Again, put Food on the horizontal axis. Label axes and important points on - 2 - the diagram. (f ) Draw the world relative supply curve (labelled RS) for F/C with the relative price of Food pF /pC on the vertical axis (assuming labour does not move between countries). Label axes and important points on the diagram. (g) On your diagram in (f), draw a Relative Demand curve (labelled RD 1) that yields an equilibrium where each country is specialized in producing the good in which it has a comparative advantage. Which country exports which good? Do they both gain from trade? Why? (h) Redraw the relative supply curve from (f) and now draw a Relative Demand curve (labelled RD 2) that yields an equilibrium where Thule produces both goods and Atlantis is specialized in producing only one good. Which country exports which good? Do they both gain from trade? Why? (i) Suppose that in the free trade equilibrium, p F = 2 and p C = 1. Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. What good would Atlantis export if these were the prices? Would Atlantis gain from trade? Why? (j) Suppose now instead that in the free trade equilibrium, p F = 1 and p C = 1. Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. How is your diagram different from (i)? Why? Is Atlantis better off or worse off at these prices as compared with those in (i)? Why?
Chapter21: International Trade And Finance
Section: Chapter Questions
Problem 2SQ
Related questions
Question
Transcribed Image Text:There are two countries, Atlantis and Thule, and two
goods, Clothing (C) and food (F) In Atlantis, it takes 3
units of labour to produce a unit of Clothing and 3 units
of labour to make a unit of Food. In Thule, a unit of
Clothing requires 2 units of labour, and a unit of Food
requires 5 units of labour. Assume that Atlantis has 300
units of labour, and Thule has 500 units of labour. (a)
What is the opportunity cost of Food in terms of
Clothing in each country? (b) Which country has an
absolute advantage in which good? (c) Which country
has a comparative advantage in which good? Why? (d)
Draw the production possibilities frontier for each
country (put Food on the horizontal axis). Label axes
and slopes. (e) Draw the world production possibilities
frontier (assuming labour does not move between
countries). Again, put Food on the horizontal axis.
Label axes and important points on - 2 - the diagram. (f
) Draw the world relative supply curve (labelled RS) for
F/C with the relative price of Food pF /pC on the
vertical axis (assuming labour does not move between
countries). Label axes and important points on the
diagram. (g) On your diagram in (f), draw a Relative
Demand curve (labelled RD 1) that yields an
equilibrium where each country is specialized in
producing the good in which it has a comparative
advantage. Which country exports which good? Do
they both gain from trade? Why? (h) Redraw the
relative supply curve from (f) and now draw a Relative
Demand curve (labelled RD 2) that yields an
equilibrium where Thule produces both goods and
Atlantis is specialized in producing only one good.
Which country exports which good? Do they both gain
from trade? Why? (i) Suppose that in the free trade
equilibrium, p F = 2 and p C = 1. Write the equation
for the budget constraint for Atlantis. Draw a diagram
showing both Atlantis' production possibilities frontier
and its budget constraint. What good would Atlantis
export if these were the prices? Would Atlantis gain
from trade? Why? (j) Suppose now instead that in the
free trade equilibrium, p F = 1 and p C = 1. Write the
equation for the budget constraint for Atlantis. Draw a
diagram showing both Atlantis' production possibilities
frontier and its budget constraint. How is your diagram
different from (i)? Why? Is Atlantis better off or worse
off at these prices as compared with those in (i)? Why?
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