Question

1. What is the difference between the production possibilities curve and the consumption possibilities curve?
2. Assume that the world consists of Norway and Sweden and that these countries do not trade with each other. There are two goods in this world: timber and mobile phones. Assume that Sweden needs 1 worker to produce a unit of timber and 2 workers to produce a mobile phone. Norway needs 6 workers to produce a unit of timber and 3 workers to produce a mobile phone. Use the Ricardian model to answer the following questions. A)Assume that both countries produce both goods in autarky: what will the autarky prices be in the two countries? B)Now we allow the countries to trade with each other. Assume that the equilibrium with trade is such that one country fully specializes in the production of timber and the other country in mobile phones. Which country specializes in which good? C)Give one potential global relative price that would generate full specialization in both countries. D)How can trade benefit an entire country and create winners and losers within that country at the same time?

Answer 1

countries ----------------Norway and Swedan

do not trade with each other

goods= timber and mobile phones

Swedan needs 1 worker to produce unit of timber

                       2 workers to produce a mobile phones.

Norway needs 6 workers to produce unit of timber

                       3 workers to produce a mobile phone

(a) if both the countries produce in autrky no trade with each other

caculate the relative prices of timber with mobile phone i.e., P_t / P_m

_{we should first recognize that in the absence of trade a countries consumption possibilities same as production possibilities if we assume that positive demand for both the goods in autarky and the consumption possibilities are given directly in PPF (production possibility frontier) than} P_t / P_{m that is 1/2 at the slope of PPF. (swedan)}

_{AND this is with Norway} P_t / P_{m     that is 6/3}

_{(b) comparative advatage with foreign trade}