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Unformatted text preview: Econ 370 Fall 2011 International Trade Professor Soderbery Homework 1 ANSWER KEY Short Answer Questions (answer the following questions in a few sentences) 1. What determines patterns of international trade between countries in the Ricardian model? ANSWER: The patterns of trade are determined by comparative advantage. The country with a comparative advantage in the production of a product will export that good. 2. Why is the production possibility frontier a straight line in the Ricardian model? ANSWER: The production possibilities frontier is a straight line in the Ricardian model because of the assumption that the marginal products of labor are constant. The Ricardian model ignores the role of land and capital so there are no diminishing returns. 3. Using the Ricardian model explain why American workers receive higher wages in the production of automobiles than Chinese workers. ANSWER: American automobile workers receive higher wages than Chinese automobile workers because the United States has an absolute advantage in the production of many goods, including automobiles. Computational Questions (for full credit show all work) 4. Suppose that England and Portugal are the only countries in the world and that labor is the only productive input. In Portugal, it requires 1 hour of labor to produce 3 bushels of wheat (W) and 1 hour of labor to produce 3 yards of cloth (C). In the England, it requires 1 hour of labor to produce 6 bushels of wheat (W) and 1 hour of labor to produce 4 yards of cloth (C). a. What is the marginal product of labor in the wheat and cloth industry in England? In Portugal? Complete the following table. Marginal Productivity of Labor Bushels of Wheat (W) Yards of Cloth (C) Portugal 3 3 England 6 4 b. What country has absolute advantage in the production of W? C? Explain. ANSWER England has an absolute advantage in the production of both W and C. Econ 370 Fall 2011 International Trade Professor Soderbery c. Determine the autarky (pre-trade) relative prices (P W /P C ) i.e. the price of a bushel of wheat in units of yards of cloth in each country? ANSWER: Recall P W /P C = MPL C /MPL W . Therefore, in England P W /P C = 2/3 and in Portugal P W /P C = 1 d. Using your answer from part a complete the following table. Marginal Productivity of Labor Opportunity cost of producing 1 unit of Bushels of Wheat (W) Yards of Cloth (C) W C Portugal ? ? 1 1 England ? ? 2/3 3/2 e. What country has comparative advantage in W? in C? Explain. ANSWER: England has a comparative advantage in the production of wheat and Portugal has a comparative advantage in the production of cloth because comparative advantage is determined by the opportunity cost of production....
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