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.

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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