Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 34, Problem 2TY
a)
To determine
The price ratio between the two commodities before trade.
b)
To determine
The goods imported by both nations once the free trade occurs.
c)
To determine
The price ratio under free trade.
d)
To determine
A possible post-trade price ratio.
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Students have asked these similar questions
Country X has 100 units of labour and country Y has 200 units of labour. Both
countries produce computers and televisions. The unit labour requirements are
given in the table below:
Computers
Televisions
Country X
50
Country Y
100
Assume that free trade exists and that the relative price is such that both
countries specialize completely in the industry in which they have a comparative
advantage (neither country produces both goods). The supply of computers
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Select one:
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O b. 0.013 (or 1/75)
c. 0.01 (or 1/100)
d. impossible to determine without knowing the relative price of computers
in terms of televisions
Assume that Home and Foreign produce only two goods – Cars and Tvs. Home has 400 units of labour available. In Home, the unit labour requirement in car production is 40 and in TV production it is 20. On the other hand, Foreign has 450 units of labour available. Foreign’s unit labour requirement in car production is 75, while in TV production it is 15.
i. Suppose that the number of workers increases from 400 to 800 in Home. Find the new equilibrium relative price. What can you say about the efficiency of world production and the gains from trade between Home and Foreign in this case?
j. Suppose that Home has now 800 workers, but they are only half as productive in both industries as we have been assuming. Consider Foreign to have the initial 450 workers only and the same productivity in both industries. Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described in problem h.
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.
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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…
Chapter 34 Solutions
Economics: Principles & Policy
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