International Trade Policy

Assignment Ch02
ID__2022313686__ Name____장유리_____

1. In England to produce the cloth they may require the labor of 100 men for 1 year;
and if she attempted to make the wine, it might require the labor of 120 men for the
same time.
To produce the wine in Portugal, they might require only the labor of 80 men for 1
year, and to produce the cloth they might require the labor of 90 men for the same
time.
It would therefore be advantageous for Portugal to export wine in exchange for
cloth. This exchange might even take place, notwithstanding that the commodity
imported by Portugal could be produced there with less labor than in England.
Suppose that the amount of labor can produce 1,000 yards of cloth or 1,000 bottles
of wine in either country.
Then answer the following questions:
(1) What is England’s marginal product of labor in cloth and in wine, and what is
Portugal’s marginal product of labor in cloth and in wine? Which country has
absolute advantage in cloth and in wine, and why?
<England>
marginal product of labor in cloth : MPLc= 1000 / 100 =10
marginal product of labor in wine : MPLw =1000 / 120 =8.3
<Portugal>
marginal product of labor in cloth : MPL*c= 1000 / 90 = 11.1
marginal product of labor in wine : MPL*w =1000 / 80= 12.5
90 men produce 1,000 yards of cloth, so MPL* c 1000 / 90 11.1.
Portugal has an absolute advantage in both cloth and wine. It has higher marginal
products of labor in both industries.
(2) Compute the no-trade relative price of wine in each country. Which country
has comparative advantage in wine, and why?
<England>
 Pw / Pc = MPLc / MPLw
=10 / 8.3 =1.2

<Portugal>
Pw / Pc = MPL*c / MPL*w
= 11.1 / 12.5 = 0.9

The no-trade relative price of wine is lower in Portugal.

Portugal has comparative advantage in wine, and England has comparative advantage in
cloth.

2. Suppose that each worker in the home country can produce three cars or two
televisions. Assume that Home has four workers.
(1) . Graph the production possibilities frontier for the home country. Place car on x-
axis. Assume constant opportunity cost.

Slope = (MPLtv / MPLc ) = -2/3

(2) What is the no-trade relative price of cars at Home? Assume constant opportunity
cost.
 Pc / Ptv = 2/3

3. . Suppose that each worker in the foreign country can produce two cars or three
televisions. Assume that Foreign also has four workers.
(1) Graph the production possibilities frontier for the foreign country. Place car on
x-axis. Assume constant opportunity cost.

Slope = (MPL*tv / MPL*c ) = -3/2

(2) What is the no-trade relative price of cars in Foreign? Assume constant
opportunity cost.
P*c / P*tv = 3/2

(3) Using the information provided in problem 2 regarding Home, in which good
does Foreign have a comparative advantage and why?
Foreign has a comparative advantage in producing televisions. It has a lower
opportunity cost than Home in television production.

4. Suppose that in the absence of trade, Home consumes nine cars and two televisions
and Foreign consumes two cars and nine televisions. Add the indifference curve for
each country to the figures in problems 2 and 3. Label the production possibilities
frontier (PPF), the indifference curve (U1), and the no-trade equilibrium
 consumption and production for each country. Label Home and Foreign’s no-trade
consumption points as A and A* , respectively. Place car on x-axis. Assume
constant opportunity cost.

5. Now suppose the world relative price of cars is Pc/Ptv=1.

(1) What good will each country specialize in? Briefly explain why.
Home will export cars and import televisions. The foreign country will export
televisions and import cars. Because Home has a comparative advantage in cars and
Foreign has a comparative advantage in televisions.

(2) Graph the new world price line for each country in the figures in problem 4, and
add a new indifference curve (U2) for each country in the trade equilibrium.
Place car on x-axis. Assume constant opportunity cost.

(3) Label the exports and imports for each country. How does the amount of Home
exports compare with Foreign imports?
 The amount of Home exports of cars is equal to the amount of Foreign car imports.

(4) Does each country gain from trade? Briefly explain why or why not.
Both country benefit from trade. Because they can consume on higher indifference
curves.

6. Answer the questions below using the information given by the following table.
Home Country Foreign Country
Number of bicycles 4 2
produced per hour
Number of snowboards 6 8
produced per hour

(1) Which country has an absolute advantage in the production of bicycles?

Home

(2) Which country has an absolute advantage in the production of snowboards?

Foreign

(3) What is the opportunity cost of bicycles in terms of snowboards at Home? What is
the opportunity cost of bicycles in terms of snowboards in Foreign?
<Home>
The opportunity cost of one bicycle is 3/2 snowboards.

<The foreign country>

The opportunity cost of one bicycle is 8/2 snowboards .
(4) Which product will Home export and which product will Foreign export? Briefly
explain why.
Foreign has a comparative advantage in snowboard production because the opportunity
cost of snowboard production is lower than in Home. And considering the comparative
advantage of foreign, the home has a comparative advantage in bicycle production. So
the home exports bicycles and Foreign will export snowboards.

7. Assume that Home and Foreign produce two goods, televisions and cars, and use
the following information to answer the questions.
In the no-trade equilibrium
Home Country Foreign Country
WAGEtv=12 WAGEc=? WAGE*tv=? WAGE*c=6
MPLtv=2 MPLc=? MPL*tv=? MPL*c=1
Ptv=? Pc=4 P*tv=3 P*c=?

(1) What is the marginal product of labor for televisions and cars in the Home
country? What is the no-trade relative price of televisions at Home?
MPLc= 3, MPLtv= 2,
Ptv / Pc= MPLc / MPLtv= 3/2

(2) What is the marginal product of labor for televisions and cars in Foreign? What is
the no-trade relative price of televisions in Foreign?
MPL* c =1, MPL* tv =2,
P * tv / P * C= MPL* c / MPL* tv =1/2
(3) Suppose the world relative price of televisions in the trade equilibrium is Ptv/Pc=1.
Which good will each country export? Briefly explain why.
Home will export cars and Foreign will export televisions. Because Home has a
comparative advantage in cars and Foreign has a comparative advantage in televisions.
(4) In the trade equilibrium, what is the real wage at Home in terms of cars and in
terms of televisions? How do these values compare with the real wage in terms of
either good in the no-trade equilibrium?
Foreign workers are paid in terms of televisions. Foreign gains in terms of cars.
Home wages with trade
(PC / PTV) ∙ MPLc= (1) ∙ 3 = 3 units of TV
Home wages without trade
(PC / PTV) ∙ MPLc= (2/3) ∙ 3 = 2 units of TV

(5) In the trade equilibrium, what is the real wage in Foreign in terms of televisions
and in terms of cars? How do these values compare with the real wage in terms of
either good in the no-trade equilibrium?
Foreign workers earn less than workers at Home in terms of cars.
Foreign wages with trade
(Ptv / Pc) = MPL* tv = (1) ∙ 2= 2 units of cars
Foreign wages without trade
(P * tv / P * c) = MPL* tv = (1/2) ∙ 2 = 1 unit of car

(6) In the trade equilibrium, do Foreign workers earn more or less than those at
Home, measured in terms of their ability to purchase goods? Explain why.
Because Home has an absolute advantage in car production, Foreign workers earn less
than those working at Home. Also, Home workers earn more than Foreign in the
television field.