International Trade

9006 words 37 pages
Chapter 2
1.Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. a.Graph out the production possibilities frontier:

b.What is the opportunity cost of apples in terms of bananas? [pic] c.In the absence of trade, what would the price of apples in terms of bananas be? In the absence of trade, since labor is the only factor of production and supply decisions are determined by the attempts of individuals to maximize their earnings in a competitive economy, only when [pic]will both goods be produced. So [pic]
2.Home is as described in problem 1. There is now also another country, Foreign,
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Because most of those services are non-traded, Japanese could not benefit from those lower service costs. And U.S. does not have to face a lower international price of services. So the purchasing power of Japanese is just one-third of their U.S. counterparts.
9.How does the fact that many goods are non-traded affect the extent of possible gains from trade? Actually the gains from trade depended on the proportion of non-traded goods. The gains will increase as the proportion of non-traded goods decrease.
10.We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each country has only one factor of production, labor. What could we say about the pattern of production and in this case? (Hint: Try constructing the world relative supply curve.)
[pic]
Any countries to the left of the intersection of the relative demand and relative supply curves export the good in which they have a comparative advantage relative to any country to the right of the intersection. If the intersection occurs in a horizontal portion then the country with that price ratio produces both goods.
Chapter 3
1. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana 1986 was a year of economic decline. Why? It can deduce that Texas and Louisiana

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