Chapter 3-Interdependence and Gains from Trade-Class Notes

Chapter 3-Interdependence and Gains from Trade-Class Notes...

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1 Chapter 3. Interdependence and Gains from Trade 1) Principle of Comparative Advantage 2) Gains from Trade 3) Consumption Possibility Frontier 4) Imports and Exports 5) Limits on the terms of trade Bread Cakes 0 5 10 Slope= A Bread Cakes 0 2 8 Slope= B

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2 Questions: 1. If A produces 4 cakes, what is the maximum number of bread that he can make? Show this as point A on his graph. 2. B used half of his resources for cake and the other half for bread production. Show this as point B on his graph. 3. Assume now that they completely specialize according to PCA. What do they produce in this case? Show this as point S on each graph. 4. After they completely specialize, they trade 1 cake for 3 breads. T c =3Bread/cake. Show this new consumption point as point T on each graph. 5. Show the CPF for A and B in case 4 above. 6. Show imports and exports for each country. 7. Construct a table where you can clearly show the gains from trade.
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