UNIVERSITY COLLEGE OF CUNDINAMARCA

FACULTY OF ADMINISTRATION AND ECONOMICS

INTERNATIONAL ECONOMICS 1
ECONOMY PROGRAM
GROUP B
Lizeth Tatiana Aragón Arias

EXERCISES CHAPTER 3

Our country has 1,200 units of work. It can produce two goods,
apples and bananas. The labor requirement per unit in production
The apples are 3, while in the bananas it is 2.
L = 1200

Apple 3

Bananas 2

a. Graphically represent the production possibility frontier of

our country.

1200
= 3
= 400
1200
= 2
= 600

b. What is the opportunity cost of apples in terms of

bananas?

3
= 2
=5
To produce one more apple, 1.5 units stop being produced.
banana

c. In the absence of trade, what would be the price of apples in

Terms of bananas? Why?
 3
= 2
= 1. 5
Because the relative prices without trade are equal to their respective ones.
opportunity costs.

2. Our country is like the one described in problem 1. There is another country, the
foreign, with a workload equal to 800. The unit requirement
foreign labor in apple production is 5, while in
the bananas are 1
í
1200
= 800

Our country Foreign

Apple 3 5

Bananas 2 1

a. Graphically represent the production possibilities frontier of the

foreigner.

800
= 5
= 160
800 equals 800
= 1

b. Build the global relative supply curve.

3. Now suppose that global relative demand has the following form:
Demand for apples/demand for bananas = price of bananas/price of
apples.
= = á
= á =
= ,

= =

1
= 2

The relative equilibrium price of apples, as it is determined in

the intersection of global relative supply (RS) and global relative demand
 (DR) and we see that they never match, we say that we do not have a price
relative equilibrium of the apples.
The demand is inversely proportional in this exercise to the supply, thus
that if we increase the global supply of apples, their demand decreases
worldwide; this happens, without demand ever being equal to supply.
worldwide apple figures relative to bananas.

4. Suppose that instead of 1,200 workers, our country has 2,400.

Determine the equilibrium relative price. What can be said about the division?
from the profits of trade between our country and abroad in this case?

2400
= = 2
= 1200 ó á
2400
= = 3
= 800 ó

800
= = 1
= 800 ó á
800
= = 5
= 800 ó

2400
= 2
= 1200 á
2400
= 3
800

1200 3
= 800
= 2
3
2
=

It can be said that it is relative since there is no marked difference in the

production cost which refers that the production is equivalent due to
the supply and demand and this leads to a distribution or division of the
profits from trade exchange and supply and demand increase as the
production. Furthermore, our country does not need to specialize in
apples and bananas, if the foreign economy does not specialize
completely in the banana production, thus the profits.

5. Suppose that our country has 2,400 workers, but only half of them
more productive in both industries than previously assumed. Obtain the
global relative supply curve and determine the equilibrium relative price.
How do the profits from trade compare to those from problem 4?

Although the real relative price depends on demand, we know that it will be situated
between the opportunity cost of the product in both countries. In our country, Alm=3,
 Alp=2, therefore, the opportunity cost of the apple is 3 in relation to the banana.
Abroad Alḿ= 5, Alṕ= 1, therefore, the opportunity cost of the
apple is 5 in the world equilibrium. The relative price of the apple must
to be positioned among those values. In this exercise, we assume that, at equilibrium
worldwide, 3k of bananas are exchanged for 1k of apples and if 1k of apples is
sell for 3k of bananas, in our country 3 people are needed per kilogram of
apple and 2 per kilo of bananas, then if it produces apple there will be 800 kilos of
apple, or in terms of bananas, it would be 2400 kilos of bananas. Abroad
800 kilograms of bananas would be produced or in terms of apples 266.7 kilograms of
apples exchanged in our country, much more than they could
produce (160 kilos of apple) therefore, foreign workers could
earn more producing bananas than apples.

Trade gain: Our country is more efficient at producing

apples and exchanging for bananas, producing bananas
directly. Clearly our country benefits from trade. In the same
the foreigner can use one hour to produce 1k of bananas or
1/5 of an apple, if it produces bananas and exchanges it, it gets 1/3 kilo of
apple, this is almost less than double what it would produce the apple
directly.

Chinese workers only earn $0.75 an hour; if we allow

China can export whatever it wants to the United States, our workers...
they will be forced to lower their salary to the same level. They cannot be imported
shirts at 10 dollars regardless of the 0.75 dollars in wages that go with it
"them." Justify your answer.

When trade occurs between the United States and China, what really
the prices of the goods that are traded and the advantages
comparisons of each country, really in trade salaries do not matter, but rather
what matters is that the level of productivity is high, so that States
Unidos will acquire shirts from China as long as China has advantages.
comparisons in the production of these, and the prices are lower than if they
produced internally by the United States.

7. The productivity of Japanese labor in the manufacturing sector is

approximately the same as that of the United States (higher in some
industries, smaller in others), while the American nation is still
considerably more productive in the service sector. However, the
the majority of services are not commercial. Some analysts have argued
that this fact constitutes a problem for the United States, because its
comparative advantage is based on elements that cannot be sold in the
global markets. Where does the error lie in this argument?
 The error lies in not considering the transportation costs that are also
they are part of the costs that are considered for production, so when not
Taking these costs into account, it cannot be marketed because they are too high.
raised to the point that no matter how economical they are outside, they will go to
prefer the internal goods that make transportation a lower cost, bringing a
lower consumer prices and therefore they consume domestic goods.

8. Anyone who has visited Japan knows that it is an incredibly amazing place.
Dear; despite the fact that Japanese workers earn approximately the
same as their American counterparts, the purchasing power of their
rentals are located in a third party. Expand your explanation of problem 7 for
explain this observation. (Suggestion: think about wages and prices of
non-tradable goods.)

There are two important factors to understand why there is a level of cost in Japan.
of such a high standard of living, and the fact is that first, although wages are similar to those of
United States, that is to say, they are high, the problem is the prices of things, and
enters the factor of purchasing power, making that even though the salary is
high will not be enough for much, and this has a direct connection with the
second point, which relates to transportation costs, because if Japan is going to
importing some products, you have to keep in mind that when bringing products
very costly to the country, it will be because possibly among the costs are
internally the transportation costs, but taking into account that Japan is not going to
to have a level of production that generates a lot of goods because
loses the comparative advantage it has, so it decides to import the goods in the
which has no advantages even though they arrive very expensively in the country and the power
purchasing power of people is low.

9. How does the fact that it influences potential trade profits?

many goods are non-tradable?

If there are many goods that are non-tradable, it causes many countries to have
that we must start producing them because transportation costs are going to be
that it is preferred to produce them internally, and if this happens, it means
that there will be a regulation from the market regarding the advantages
extremely high comparisons compared to the advantages of other countries
lower, because if for example the United States has a very high advantage in
produce computers and there would be no other country in the world that could compete with
he, in the production of that good, the United States would only dedicate itself to producing
computers and will use them as a means of exchange for all other goods
that would not produce, but the existence of these non-tradable goods obliges States
United to what must also produce a certain amount of these goods, using part of
of the resources it has available, thus regulating its comparative advantage.

10. We have analyzed trade in a world with two countries. Suppose that
there are many countries capable of producing two goods, and each country has
a single factor of production, labor. What can we say about the pattern
of production and commerce in this case? (Suggestion: try to build the
relative global supply curve.

If we take into account several countries and not just two, we will find that the
the vast majority of countries will produce both goods, but that clearly they
they will dedicate themselves to the production of goods in which they have the greatest advantage
comparison, so that with the same production of these goods it begins
a marketing strategy for countries to deliver the goods they are in
productive and acquire that good in which they are not so efficient, making a
exchange of goods and generating well-being among all countries.