Vintland Moonited Republic
Labor Hours per Bottle of Wine
15 10
Labor Hours per Kilogram of Cheese
10 4
Vintland has 30 million hours of labor in total per year. Moonited republic has 20 million hours of labor per year.
(1) Which country has an absolute advantage in wine? In cheese? (2) Which county has a comparative advantage in wine? In cheese?
(3) Graph each country’s production-possibility curve. Using community indifference curves, show the no-trade equilibrium for each country (assuming that with no trade, Vintland consumes 1.5 million kilos of cheese and Moonited Republic consumes 3 million kilos of cheese).
(4)when trade is opened, which country exports which good? If the equilibrium international price ratio is 1/2 bottle of wine per kilo of cheese, what happens to production in each country?
(5) In this free-trade equilibrium, 2 million kilos of cheese and 1million bottles of wine are traded. What is the consumption point in each country with free trade? Show this graphically using community indifference curves.
(6) Does each country gain from trade? Explain, referring to your graphs as is appropriate.
2. What is “immiserizing growth”? Show the crucial conditions of immiserizing growth and draw a graph to explain it.
3. A free trade equilibrium exists in which the United States exports machinery and imports clothing from the rest of the world. The goods are produced with two factors: capital and labor. The trade pattern is the one predicted by the H-O theory. An increase now occurs in the U.S. endowment of capital, its abundant factor.
(1) What is the effect on the shape and position of the U.S. production-possibility curve?
(2) What is the effect on the actual production quantities in the United States if the product price ratio is unchanged? Explain.
(3) What is the effect on the U.S. willingness to trade?
(4) Assuming that the U.S. growth does affect the international equilibrium price ratio, what is the direction of the change in this price ratio?
(5) Is it possible that U.S. national well-being declines as a result of the endowment growth and the resulting change in the international rice ratio? Explain.
4. A small country imports sugar. With free trade at the world price of $0.10 per pound, the country’s national market is:
Domestic production 120 million pounds per year Domestic consumption 440 million pounds per year Imports 320 million pounds per year
The country’s government now decides to impose a quota that limits sugar imports to 240 million pounds per year. With the import quota in effect, the domestic price rises to $0.12 per pound, and domestic production increases to 160 million pounds per year. The government auctions the rights to import the 240 million pounds.
(1) Calculate how much domestic producers gain or lose from the quota.
(2) Calculate how much domestic consumers gain or lose from the quota.
(3) Calculate how much the government receives in payment when it auctions the quota right to
import.
(4) Calculate the net national gain or loss from the quota. Explain the economic reasons for this
net gain or loss.
5. You have been asked to quantify the effects of a country’s tariff on sugar. The hard part of the work is already done: somebody has estimated how many pounds of sugar would be produced, consumed, and imported by the country if there were no sugar duty. You are given the information shown in the table.
World price Tariff
Domestic price
Domestic consumption
(billions of pounds per year) Domestic production
(billions of pound per year)
Import(billions of pound per year)
Situation with Import Tariff $0.10 per pound $0.02 per pound $0.12 per pound
20 8 12
Estimated Situation without Tariff $0.10 per pound
0
$0.10 per pound
22 6 16
Calculate the following measures:
(1) The domestic consumers’ gain from removing the tariff. (2) The domestic producers’ loss from removing the tariff. (3) The government tariff revenue loss. (4) The net effect on national well-being.
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