hw2_solutions - (trade with specialization), it must be...

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Econ 4550/6550 International Trade Assignment 2/Answer Key 1. A 2. D 3. B 4. C 5. (a) 3 units of Soy in the U.S., and 1 Soy unit in Croatia. (b) The U.S. has absolute productivity advantage in toys. Nevertheless, toys are three times more costly than they are in Croatia. (c) In Croatia, one unit of soy will cost one toy. However, if the terms of trade fall between the two autarkic price ratios (a condition necessary for both countries to enjoy gains from trade), say at 2 Soy units per toy, then Croatia will gain each Soy unit with less of a sacrifice of toy production. 6. If we were to combine the production possibility frontiers of the two countries to create a single world production possibility frontier, then it is true that any change in production points (from autarky to specialization with trade) would involve a tradeoff of one good for another from the world s perspective. In other words, the new solution cannot possibly involve the production of more of both goods. However, since we know that each country is better off at the new solution
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Unformatted text preview: (trade with specialization), it must be true that the original points (autarky) were not optimal, and it was in fact possible to make some people better off without making others worse off, so that the new solution does indeed represent a welfare improvement from the world s perspective. 7. The statement in the question seems to be guided by the notion of absolute disadvantage . The Ricardian model of comparative advantage argues that the production of each good 9as long as there is more than one) embodies an opportunity cost in terms of other goods that could be produced. The basic idea is that every country must have a comparative advantage in some product (assuming there are more products than countries), which eventually creates incentives for international trade. Protectionist policies that promote autarky render it impossible for a country to exploit its comparative advantage....
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