International Trade ECO 4704/5707 Dr.
Atolia
Problem Set 1 Due in class: Tuesday, September 17, 2013 20 points
Question 1. The productivity in production of each good is shown below:
Productivity Barrels of oil per labor hour Bushels of wheat per labor hour
U.S. 6 4
Saudi Arabia 10 5
a. Which country has absolute advantage in producing oil? Why? Which country has absolute advantage in producing wheat? Why? b. What is the pre-trade (relative) price of oil (in terms of wheat) in U.S.? What is the pre-trade price of oil in Saudi Arabia? c. What is the pre-trade (relative) price of wheat (in terms of oil) in U.S.? What is the pre-trade price of wheat in Saudi Arabia? d. Which country has comparative advantage in producing oil? Why? Which country has comparative advantage in producing wheat? Why? e. Given the pre-trade prices in U.S. and Saudi Arabia, as a resident of U.S. which good would you export? What would be your prot if you buy one unit of that good in U.S. and export that to Saudi Arabia? f. Draw the production possibilities curve (ppc) for the U.S. and Saudi Arabia assuming each has 5 billion labor hours. (1+1+1+1+1+1) Question 2. Suppose U.S. and Saudi Arabia decide to trade with each other. They have same production possibilities as in the previous problem. a. Which good should U.S. specialize in and why? Which good should Saudi Arabia specialize in and why? Show the production point for U.S. and Saudi Arabia on the graphs if they specialize in this manner. b. Which of the following is a possible international price of oil after trade opens: 0.2 bushel/barrel, 0.6 bushel/barrel, 0.9 bushel/barrel, or 1.2 bushel/barrel. c. Using the plausible international price of oil from part b. above, show, on graphs, the line showing the points (combination of goods) at which U.S and Saudi Arabia can consume after trade has opened. How do these consumption points dier from the points at which they could consume in absence of trade? Explain. d. If Saudi Arabia wants to consume 10 bn bushels of wheat, how much oil will it export? (1+2+2+1)
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International Trade ECO 4704/5707 Dr. Atolia
Problem Set 1 Due in class: Tuesday, September 17, 2013 20 points
Question 3. The following graphs show the production possibilities curves for France and Italy:
France Cheese Cheese 5 PPF/ PPC 6 Billion Lbs. PPF/ PPC Billion Lbs. Italy
2.4 Billions
Pizza Billions
Pizza
a. What is the (relative) price of pizza (lbs. of cheese/pizza) in each country? b. Which country has comparative advantage in producing pizza? Which one has comparative advantage in producing cheese? c. Suppose both Italy and France consume 3 billion lbs. of cheese prior to trade. Show their pre-trade consumption points on respective graphs (label them B and B respectively on graphs). Find out the pre-trade consumption of pizza in two countries. d. Suppose each country specializes when trade opens. Which good will Italy specialize in? Which country will France specialize in? e. Now suppose the post-trade price of pizza is 3 lbs. of cheese per pizza. Also assume that consumption of cheese in France and Italy remains same as prior to trade. Show new consumption points for France and Italy (label them C and C respectively on graphs). Find out the post-trade consumption of pizza in two countries. f. Does each country gain from trade? Explain. (1+1+2+1+2+1)
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