2x since italy can produce good y at a lower

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2X. Since Italy can produce good Y at a lower opportunity cost than Canada can, Italy has acomparative advantage in the production of good Y.(c)In Canada, 1X = 1/2Y, and in Italy, 1X = 2Y. A favorable set of terms of trade wouldbe anything between these two extremes: for example, 1X = 3/4Y, or 1X = 1Y, or 1X =1 3/4Y. To see this, pick any of these terms of trade, say, 1X = 1Y. At present, Italy hasto give up 2Y to get 1X; it would prefer to give up only 1Y to get 1X. At present,
Canada gives up 1X and gets only 1/2Y; it would prefer to give up 1X and get 1Yinstead.(d)Suppose that in the no specialization–no trade case, Canada is producing and consumingat point B on its production possibilities frontier, and Italy is producing and consuming atpoint C on its production possibilities frontier. This means the situation is as follows:No Specialization–No TradeCanadaItalyProduces 100 units of XProduces 30 units of XConsumes 100 units of XConsumes 30 units of XProduces 25 units of YProduces 120 units of YConsumes 25 units of YConsumes 120 units of YNow suppose the countries agree to the terms of trade 1X = 1Y and trade (in absoluteamounts) 40C for 40Y. Canada specializes in the production of good X, Italy in theproduction of good Y. Now Canada is in this situation: It produces 150 units of X, trades40 units to Italy, and receives 40 units of Y in exchange. It consumes 110 units of X (150– 40 = 110) and 40 units of Y (received in trade). Italy is in this situation: It produces 180units of Y, trades 40 units to Canada, and receives 40 units of X in exchange. It consumes140 units of Y (180 – 40 = 140) and 40 units of X (received in trade). Thus, bothcountries consume more of both goods in the specialization-trade case than in the nospecialization–no trade case.Specialization–TradeCanadaItalyProduces 150 units of XProduces 180 units of YConsumes 110 units of XConsumes 140 units of YConsumes 40 units of YConsumes 40 units of X2.In the following figure, PWis the world price and PW+ T is the world price plus atariff. Identify the following: (a) The level of imports at PW; (b) The level of importsat PW+ T; (c) The loss of consumers’ surplus as a result of a tariff; (d) The gain inproducers' surplus as a result of a tariff; (e) The tariff revenue as the result of atariff; (f) The net loss to society as a result of a tariff; (g) The net benefit to society ofmoving from a tariff situation to a no-tariff situation.(a)Imports at PWare Q2– Q1.(b)Imports at PW+ T are Q4– Q3.(c)Lost consumers’ surplus is areas 3 + 4 + 5 + 6.(d)The gain in producers’ surplus is area 3.(e)The tariff revenue is area 5.(f)Net loss to society is areas 4 + 6.(g)The net benefit to society of removing tariffs is areas 4 + 6.
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Term
Fall
Professor
HyojinJeong

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