Question

Table 1

	Country A	Country B
Textiles	4	4
Soybeans	4	5

The numbers in the table indicate the number of hours required to produce 1 unit of the good

Question 15 to 19: please refer to Table 1

Question 15

Who has the absolute advantage at Soybeans, and why?

4 Points

a.) Country B, since PS,A/PT,A=1 and PS,B/PT,B=⅘

b.) Country A, since PS,A/PT,A=1 and PS,B/PT,B=5/4   

c.) Country A, since the number of hours required to make soybeans in A is lower than in B

d.) Neither Country A nor Country B, since the the number of hours required to make soybeans in A is equal to the number of hours required in B

Question 16

Who has the comparative advantage at Soybeans, and why?

4 Points

a.) Country B, since PS,A/PT,A=1 and PS,B/PT,B=⅘

b.) Country A, since PS,A/PT,A=1 and PS,B/PT,B=5/4

c.) Country B, since the number of hours required to make soybeans in B is lower than in A

d.) Neither Country A nor Country B, since the the number of hours required to make soybeans in A is equal to the number of hours required in B

Question 17

What is PT in Autarky?

4 Points

a.) PT,B=5wB in Country B, and PT,A=4wA in Country A

b.) PT,B=4 in Country B, and PT,A=4 in Country A

c.) PT,B=4wB in Country B, and PT,A=4wA in Country A

d.) PT,B=⅘ in Country B, and PT,A=1 in Country A

Question 18

The Terms of Trade (PS/PT) can be equal to 0.9 when Country A and Country B open up to trade

4 Points

a.) True

b.) False

c.) Not enough information

d.) Too much information!?

Question 19

What are the per-unit gains of specialization based on comparative advantage?

4 Points

a.) Soybeans: +0.25, Textiles: 0

b.) Soybeans: 0, Textiles +0.25

c.) Soybeans: +1, Textiles +5/4

d.) Soybeans: -1, Textiles +0.25

Answer 1

15)

The correct answer is (c) Country A, since the number of hours required to make soybeans in A is lower than in B

According to theory of absolute advantage, a person, nation, etc has absolute advantage in producing a good If he can produce more amount of good in a given time. We can see from the table that country A can produce soybeans in 4 hours while Country B can produce soybeans in 5 hours. Hence With any Time country A will produce more soybeans. Hence Country A has absolute advantage in producing soybeans.

16)

The correct answer is (b) Country A, since PS,A/PT,A=1 and PS,B/PT,B=5/4

According to theory of comparative advantage, a person, nation, etc has comparative advantage in producing a good If he can produce a good at a lower opportunity cost.

Country A can produce soybeans in 4 hours and with this 4 hours country A can produce textiles. Hence opportunity cost of soybeans in country A is 1 textiles.

Country B can produce soybeans in 4 hours and with this 4 hours country B can produce 5/4 = 1.25 textiles. Hence opportunity cost of soybeans in country B is 1.25 textiles.

Hence opportunity cost of producing Soybeans is lower in Country A. Hence, Country A has comparative advantage in producing soybeans.

17)

The correct answer is (c) PT,B=4wB in Country B, and PT,A=4wA in Country A

As discussed above that Country A can produce soybeans in 4 hours and let wage rate in A = wA. Hence In autarky price of textile = 4wA. Also, Country B can produce soybeans in 4 hours and let wage rate in A = wB. Hence In autarky price of textile = 4wB.

18)

The correct answer is (b) False
As discussed above country has comparative advantage in producing soybeans and hence he will export soybeans. Also he can produce 1 soybean at a cost of 1 textile. hence he will export Soybeans if he get more than 1 textile for 1 soybeans. Country b can produce 1 soybeans at a cost of 1.25 textiles. Hence he will be enefited of trade if he pays less than 1.25 textile for soybeans.

hence Country A will will benefited from trade If PS > 1PT and Country B will will benefited from trade If 1.25 PT > 1PS

=> Trade will occur If 1.25PT > PS > PT => 1.25 > PS/PT > 1. Here, PS/PT = 0.9 and hence it fails to satisfy the above condition.

Hence Trade will not occur at this terms of Trade.