Microeconomics: Principles & Policy
14th Edition
ISBN: 9781337794992
Author: William J. Baumol, Alan S. Blinder, John L. Solow
Publisher: Cengage Learning
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Consider 2 countries (the United States and the France) that use input such as labor to produce 2 different goods: cloth and wine. In France, 1 hour of labor can produce either 20 wines or 10 cloths. In the United States, 1 hour of labor can produce either 30 wines or 20 cloths. You are required to determine how should each country make optimize the use of labor that is by producing the good in which they have a comparative advantage.
The following table describes the number of yards of cloth and barrels of wine that can be produced with a week’s worth of labor in England and Portugal. Assume that no other inputs are needed.
In England In Portugal
Cloth 8 yards 12 yards
Wine 2 barrels 6 barrels
If there is no trade, what is the price of wine in terms of cloth in England?
If there is no trade, what is the price of wine in terms of cloth in Portugal?
Suppose each country has 1 million weeks of labor available per year. Draw the production possibilities frontier for each country.
Which country has an absolute advantage in the production of which good(s)? Which country has a comparative advantage in the production of which good(s)?
If the countries start…
Assuming that there are only two countries in the world, Indonesia and ROW (Rest of the World) which both produce Cloth (C) and Food (F) using labor as factor production. The following table shows the number of hours of work needed to produce one unit of C and F in both countries:
Cloth (C)
Food (F)
Indonesia
1 hour per meter
2 hour per kg
ROW
6 hour per meter
3 hour per kg
Please answer the followings:
a. If we use the Smithian Absolute advantage, can both countries gain? Why?
b. Eventually, these countries can still trade, please explain
c. Please show the gains from trade for producers and consumers in both countries
d. Can we see a catching up (factor price) pattern for both countries?
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