Download ANSWERS TO INTERNATIONAL TRADE PROBLEMS

ANSWERS TO INTERNATIONAL TRADE PROBLEMS
Question #1
a.
The two production possibilities curves are straight lines and are parallel.
b.
20 Y cost 40 X in Alpha. So, 1Y costs 2X.
10Y cost 20X in Omega. So, 1Y costs 2X.
c.
Alpha will not trade because the both countries have the same opportunity costs.
They will not benefit from trade.
Question #2
a.
In Japan, 6 radios cost 6 pineapples. So, 1 radio costs 1 pineapple.
In Hawaii, 2 radios cost 4 pineapples. So, 1 radio costs 2 pineapples.
In Hawaii, 1 pineapple costs ½ radio.
b.
Yes, the 2 countries will specialize because the opportunity costs or producing
radios are different in each country. The opportunity costs of producing
pineapples are also different.
c.
Japan has a comparative advantage in radios because the opportunity cost of
radios is lower in Japan. Japan will specialize in radios.
Hawaii has a comparative advantage in pineapples because the opportunity cost of
pineapples is lower in Hawaii. Hawaii will specialize in pineapples.
d.
After specialization, world production increases by 2 radios and by 2 pineapples.
e.
One radio will trade for more than 1 pineapple and for less than 2 pineapples.
1 pineapple < 1 radio < 2 pineapples
Japan wants to receive more than 1 pineapple and Hawaii wants to give up less
than 2 pineapples.
f.
After trade, consumption of radios increased by 2 in Japan while consumption of
pineapples increased by 2 in Hawaii.
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g.
Yes. Specialization results in higher production and consumption. Production of
each good increased by 2. Consumption of radios increased in Japan while
consumption of pineapples increased in Hawaii.
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