Microeconomics
13th Edition
ISBN: 9781337617406
Author: Roger A. Arnold
Publisher: Cengage Learning
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Question
Chapter 20.1, Problem 1ST
To determine
The favorable terms of trade between Country U and Country UK
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Suppose Country A can produce 200 tons of capital-intensive goods or 200 tons of labor-intensive goods in one day. Suppose Country B can produce 80 tons of capital-intensive goods or 160 tons of labor-intensive goods in one day.
What is one possible price of capital-intensive goods (in terms of labor-intensive goods) that would make BOTH countries better off as the result of trade?
When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods.
Suppose there are two countries Peru and Japan that produce Food and Fuel. Peru can produce 7,523 units of Food or 17,853 units of Fuel using a labour force of 8000. Japan can produce 5,733 units of Food or 24,156 units of Fuel using a labour force of 5000.
(g) If the terms of trade is 2 to 1 in favour of the country with the comparative advantage in food. Determine the combination of the two goods that each country will consume after trade if the country with the comparative advantage in fuel imports 4000 units of food. Label this point B and B* respectively.
h) Who gains from trade? Who loses? What is the impact if any on the world?
(i) What should the terms of trade be to make trade beneficial for BOTH Japan and Peru? Explain.
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- Happyland can produce 40 tones of marshmallows or 20 tones of chocolate in a year. Friendshipland can produce 80 tones of marshmallows or 40 tones of chocolate in a year. Can these countries benefit from trade with each other based on specialization and comparative advantage? Yes Noarrow_forwardIn Country T, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice. In Country Y, it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Country T has a comparative advantage over Country Y in cocoa. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion stems from which of these inaccurate assumptions? Multiple Choice We have assumed constant returns to scale. We have assumed the prices of resources and exchange rates in the two countries are dynamic. We have assumed there are barriers to the movement of resources from the production of one good to another within the same country. We have assumed that agrarian nations do not specialize in producing particular products. We have assumed diminishing returns to specialization.arrow_forwardIn the no specialization-no trade case, country X produces and consumes 60 units of good A and 10 units of good B. Country Y produces and consumes 20 units of good A and 20 units of good B. If the two countries specialize and trade, how many more units of good B will country X consume?arrow_forward
- What is opportunity cost of a T-shirt in Mexico? Show all your calculations. What is opportunity cost of a T-shirt in Egypt? Show all your calculations. Which country has comparative advantage in production of T-shirts? How do you know? Explain your answer.arrow_forwardAmerican worker takes 20 hours to produce one computer and 300 hours to produce an RV. A Japanese worker takes 30 hours to produce one computer and 450 Hours to produce an RV. Which country has a comparative advantage in what product? Why?arrow_forwardIf a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods. True Falsearrow_forward
- Each country should specialize in producing that good for which it a. has a comparative advantage b. has an absolute advantage c. it has a higher opportunity costarrow_forwardCountry A can produce 20 units of wheat or 10 units of corn, while Country B can produce 15 units of wheat or 5 units of corn. Which country has the comparative advantage in producing wheat?arrow_forwardSuppose the relative price of good A before trade is equal to one in the home country and two in the foreign country. If the home country is a large country and the foreign country is a small country, then the relative price of good A after trade will be equal to a.less than one b.greater than one but less than 1.5 c.1.5 d.greater than 1.5 but less than 2arrow_forward
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