Suppose USA and India can produce the following products given the resources they have (see Table 1). Also we are told that currently USA produces and consumes 40 units of textiles and 100 units of cars, while India produces and consumes 90 units of texti
economics
Description
QN 1. Suppose USA and India can produce the
following products given the resources they have (see Table 1). Also we are
told that currently USA produces and consumes 40 units of textiles and 100 units
of cars, while India produces and consumes 90 units of textiles and 40 units of
cars. Based on this data and theory of comparative advantage, answer the
following (assume constant opportunity cost):
Table 1
|
Product |
USA |
India |
|
Textiles
in tons (T) |
90 |
150 |
|
Cars
(C) |
180 |
100 |
(a): Sketch the production possibility curves (PPF) for
each country (one for USA, and one for India), with Textiles on the Y axis
(1 marks)
(b): State which country has comparative advantage
in Textiles, and which has comparative advantage in Cars (1 marks)
(c): Suppose now they started to trade and both
countries completely specialize, show (compute) the production gains from specialization
(2 marks)
(d): What is the price range Cars will trade at (i.e.
terms of trade limits)? (1 marks)
QN2. The USA
and China can produce two products (Textiles and Aircraft) (see Figure 1).
Textiles is assumed to be labor -intensive and aircraft capital-intensive. You
are also provided with USA production possibility curve (US PPF), and China’s
production possibility (China PPF). In autarky, China (assumed to be relatively
Labor – abundant) and USA (assumed to be relatively Capital – abundant) each produces
and consumes 19 units of textiles and 9 units of aircraft. Under trade, the
countries consume at point A based on the terms of trade as shown in Figure 1.
(a).
Based on the Heckscher-Ohlin (H-O) theory, briefly explain which country has
comparative advantage in Textiles and which comparative advantage in Aircraft (1
mark)
(b).
Show (compute) the production gains from specialization
(2 marks)
(c).
Show (compute) the consumption gains from trade (2 marks)
