Question

6. The country of Pugelovia has an endowment of 20 units of labor and 5 units of land, whereas the rest of the world has 80 units of labor and 10 units of land. Based on your calculation, is Pugelovia labor or land abundant? _________________  

Write down the pre trade price rations, labor capital ratios and the w/r before trade! Given that Wheat is land intensive (x) and cloth is labor intensive (y), write explain and illustrate – (1) Which country has a comparative advantage in the production of which good, and therefore establishing the pattern of trade, (2) Draw the pre trade prices before and after trade. (3) The pre and post trade consumption and finally (4) the trade triangle!

7. A country in Latin America, exports coffee (x) and imports other goods (y). It is a small supplier of coffee. A long term drought now reduces coffee production in the countries of this region. Assume that they still remain exporters of coffee. Illustrate clearly on a diagram, why this long term drought in this small country, may result in decreasing the welfare of this country. Also highlight the rybcynski theorem and explain it !!

Answer 1

Answer (6) : Since the country of Pugelovia has an endowment of 20 units of labor and 5 units of land, which means the availability of quantity labor force in Pugelovia is much more than the availability of quantity of land. Therefore, Pugelovia is a labor abundant country.

The pre-trade labor capital ratio in Pugelovia = 20:5 = 4:1

& The pre-trade labor capital ratio in the rest of the World = 80:10 = 8:1

The pre-trade ration in Pugelovia will be labor intensive in higher quantity and land in lesser quantity.

Similarly, the pre-trade ration in the rest of the world will also be labor intensive in higher quantity and land in lesser quantity.

                    Since wheat is land intensive, the rest of the world will have a comparative advantage in the production of wheat.

                   Since cloth is labor intensive, here too the rest of the world will have a comparative advantage in the production of cloth, because the rest of the world has a larger number of units of land than Pugelovia.

                  

                    From the above diagram, we can see that Wheat is measured in the X-axis and Cloth is measured in the Y-axis. Here, we can see that rest of the world will be a better producer of both Wheat and Cloth since it has an abundance of both the land and labor factors and therefore, there will not be any balance of trade between the two countries. We can see here that the two curves do not meet. This shows that Pulegovia can earn in a trade with the rest of the world by trading in both the products, but the rest of the world will not earn anything directly. It can only earn from an increased price of the exported products.

Answer(7) :

From the above diagram, we can see that Supply of coffee is measured in the X-axis and the welfare of the country is measured in the Y-axis. Here, SS1 is the curve that measures the supply of the country before the drought and S2S3 is the curve that represents the supply of the country after the drought. We can see from the above figure that before the drought OB was the welfare of the welfare of the country, and after the drought, the welfare of the country has reduced to S2S3. This shows that a reduction of the supply of labor due to the drought has led to a huge decrease in the welfare of the country.