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Unformatted text preview: 1 ECONOMICS 100 NOTES ON SOLUTIONS TO PROBLEM SET #7 (International Trade) 1. The Impact of Trade Note that the productivity data are given in the format of inputs required for certain quantities of output. In class, data were on the basis of output per a given quantity of input. Although one could carry on with the data as presented in the question, its often easier to reframe in terms of the approach in class: Output Per 100 Units of L Input HIGH LOW Bananas 100 400 Oranges 200 400 From the original or reframed data, calculate the opportunity costs: Opportunity Costs HIGH LOW Bananas 2 Oranges 1 Orange Oranges Banana 1 Banana Now look at the opportunity costs to determine that the low cost producer of Bananas is LOW and the low cost producer of Oranges is HIGH. Indeed, this was evident from the original data: LOW is better at producing both B and O, since it takes less labour input in LOW than HIGH to produce these goods, but it is comparatively better at producing B since it takes the amount of labour for B production and the amount of labour for O production, as compared to HIGH. Conclusion: When trade commences, LOW exports Bananas; HIGH exports Oranges. 2 a) PPF (Linear, of course) HIGH: B intercept is 1000; O intercept is 2000. LOW: B intercept is 2000; O intercept is 2000. HIGH LOW O O 2000 2000 1000 B 2000 B b) Here is a table that shows the impact of transferring 100 units of L from the commodity that is imported to the commodity that is exported in each country (i.e. transforming the economy towards the good that is produced most productively). Change in Output From Transformation Along PPF by 100L HIGH LOW TOTAL Bananas -100 +400 +300 Oranges +200 -400 -200 Aside: Note that this transformation is not sufficient to prove the case in favour of trade, as we have on a total or world basis an increase in B but a decrease in O. Suppose we were to change the transformation in HIGH to, say, 300 units of O....
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This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto- Toronto.
- Fall '09