International Trade
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, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1. a．Graph Foreign’s production possibilities frontier:
b．Construct the world relative supply curve.
[pic]
3．Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. a．Graph the relative demand curve along with the relative supply curve: [pic] ∵When the market achieves its equilibrium, we have [pic] ∴RD is a hyperbola [pic]
[pic]
b．What is the equilibrium relative price of apples? The equilibrium relative price of apples is determined by the intersection of the RD and RS curves. RD: [pic] RS: [pic] ∴[pic] ∴[pic] c．Describe the pattern of trade. ∵[pic] ∴In this two-country world, Home will specialize in the apple production, export apples and import bananas. Foreign will specialize in the banana production, export bananas and import apples. d．Show that both Home and Foreign gain from trade.
[pic][pic]
International trade allows Home and Foreign to consume anywhere within the colored lines, which lie outside the countries’
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, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1. a．Graph Foreign’s production possibilities frontier:
b．Construct the world relative supply curve.
[pic]
3．Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. a．Graph the relative demand curve along with the relative supply curve: [pic] ∵When the market achieves its equilibrium, we have [pic] ∴RD is a hyperbola [pic]
[pic]
b．What is the equilibrium relative price of apples? The equilibrium relative price of apples is determined by the intersection of the RD and RS curves. RD: [pic] RS: [pic] ∴[pic] ∴[pic] c．Describe the pattern of trade. ∵[pic] ∴In this two-country world, Home will specialize in the apple production, export apples and import bananas. Foreign will specialize in the banana production, export bananas and import apples. d．Show that both Home and Foreign gain from trade.
[pic][pic]
International trade allows Home and Foreign to consume anywhere within the colored lines, which lie outside the countries’