Question

Latvia and Estonia are two countries.  Assume that currently there is no trade between them.   Each country has 100 units of labor.  Latvia produces fish, at a cost of 1 unit of labor per fish, and grain, at a cost of 2 units of labor per bushel.  Estonia produces fish at a cost of 2 units of labor per fish, and grain at a cost of 3 units of labor per bushel.  Both countries consume both fish and grain.

a. True or False, the countries can both benefit if they can trade with each other?

b. Circle any and all of the following which hold:

i. Latvia will export fish if there is trade

ii. Latvia will export grain if there is trade

iii. Estonia will export fish if there is trade

iv. Estonia will export grain if there is trade

v. We do not have sufficient information to say what will be exported

Answer 1

Both countries have same units of labor

Cost of producing fish in Latvia < Cost of producing fish in Estonia

1 unit labor < 2 unit labor

If both countries trade in fish, both countries can take advantage -

Latvia produces a cheaper fish than that of Estonia. If Latvia exports fish to Estonia then Latvia can take advantage of money and Estonia can take advantage of cheaper fish and can use its labor for another work. Both countries can take advantage by doing trade with each other.

Similarly in grains

Cost of producing grains in Latvia < Cost of producing grains in Estonia

2 unit labor < 3 unit labor

If both countries trade in grains, both countries can take advantage -

Latvia produces a cheaper grain than that of Estonia. If Latvia exports grain to Estonia then Latvia can take advantage of money and Estonia can take advantage of cheaper grain and can use its labor for another work. Both countries can take advantage by doing trade with each other.

Yes, the countries can both benefit if they can trade with each other.

Option i and ii are correct answer

Latvia will export fish if there is trade

Latvia will export grain if there is trade