ECONOMICS 470

INTERNATIONAL TRADE AND FINANCE

HOMEWORK 1

Prof. Ananish Chaudhuri

Handed out: January 26, 2000

Due back: February 2, 2000

Please write neatly. There are various parts to the question. Answer each question separately. Clearly identify your answers so that there is no doubt whatsoever as to what your answer is. Draw all graphs neatly and legibly. I will take off points for sloppy work!!! You are to hand in the homework BEFORE class on the due date. You are free to hand it in anytime prior to that but I WILL NOT accept any homework handed in after 12:00 noon on February 2, 2000.

 

The following question has multiple parts. Read each part carefully and make sure you have answered each part completely.

There are eight questions. Each carries 5 points for a total of 40 points.

Consider two countries A and B and two goods X and Y. The labor coefficients in each country are as follows:

GoodCountry ACountry B
Good X416
Good Y1020

 

In addition assume that Country A has 2000 workers and Country B has 4000 workers.

  1. Which country has absolute advantage in Good X? Which country has absolute advantage in Good Y?
  2. Which country has comparative advantage in Good X and which country has comparative advantage in Good Y?
  3. How much of each good does each country produce in AUTARKY?
  4. If the two countries engage in trade then which country will produce which good?
  5. How much will country A produce of the two goods in trade and how much will country B produce of the two goods?
  6. Once the two countries start to trade what must be the upper and lower bounds (in terms of good Y) on the price of each unit of good X?
  7. Assume that the two countries trade at an intermediate price ratio BETWEEN the two bounds you found in Part (6). Assume a price ratio of your own.
  8. Draw two NEAT diagrams – one for country A and one for country B. On the diagram clearly show (1) the production possibility frontier; (2) the autarky equilibrium; (3) the consumption possibility frontier; (4) the equilibrium in trade; (5) the amount of exports and imports of each good that each country engages in.