International Economics

Economics 333

HW #1

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Due September 12, 2021

 

 

Use the following information to answer the homework:

 

 

Home      Foreign

 

Marginal Products

Cheese                       5           1

 

Wine                         3           2

 

Labor Force                 24         100

 

 

 

  1. What is relative price of wine (Pw/Pc) in the home country without trade? What is relative price of wine (P*W/P*C) in the foreign country without trade?

 

  1. What is the real wage in terms of wine in the home country?

 

  1. Suppose the price of wine is $4 in the home country. What is the nominal wage in the cheese industry (Wc) ?

 

  1. Which good(s) does home have an absolute advantage in production?

 

  1. Which good(s) does home have a comparative advantage in production?

 

  1. Suppose the home country is consuming 48 units of cheese. What is its consumption of wine?

 

  1. Sketch the production possibilities frontier and indifference curve for the home country. Draw cheese on the vertical axis and wine on the horizontal axis.  Show numerical values for the vertical and horizontal intercepts.  The indifference curve should intersect at the cheese and wine consumptions given in part f.

 

Assume trade for the remainder of the homework.

  1. What is the highest possible value of the relative price of wine (Pw/Pc) after trade? Lowest possible value?

 

For the remainder of the homework assume that Pw/Pc equals 1.5 after trade.

  1. What is the real wage in terms of wine in the home country?

 

  1. What is the real wage in terms of cheese in the foreign country?

 

  1. What is home’s production of wine after trade?

 

  1. Sketch the foreign country’s consumption possibilities frontier (budget line), with wine on the horizontal axis. Show the values of the vertical and horizontal intercepts.

 

  1. Suppose the home country is consuming 60 units of wine. What is its consumption of cheese?

 

  1. What is the foreign country’s consumption of cloth?

 

  1. Which good does the foreign country export? How much does it export?

 

  1. Calculate the relative wage between the two countries (w/w*).

 

  1. Would the home country be better off, worse off or the same if the relative price of wine after trade was less than 1.5? Explain clearly.

 

 

Point values:  Part g is worth 10 points.  Every other part is worth 6 points.

 

Extra Credit – 5 points each.  Read the following article “The Rise and Fall of Consolidated Alchemy” and answer the following questions.  The article is posted on blackboard under readings.

 

  1. The article mentions four goods. Which of these goods do you think the U.S. has a comparative advantage?

 

  1. The article expresses the idea that trade has the same effects as what other type of economic change?

 

 

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