Question

ssume that Colombia had 1,600,000 workers and Mexico had 800,000 workers, respectively. This is the only factor input to produce beef and fish.  

Units of labor required per unit of output:

     Colombia   Mexico

Beef 4      4

   Fish   8      2

Please sketch the PPFs (put beef on the horizontal axis) and find the following numbers:

(1) The maximum possible output of beef in Colombia.

(2) The autarky price ratio (the price of beef divided by the price of fish) in Mexico.

Now, discuss the situation when two countries agree to exchange two goods freely with Pbeef=$4 and Pfish=$4.

(3) Explain why each country completely specializes to produce its comparative advantage good.

(4) Assume that B (F) is the quantity of beef (fish) consumption in Colombia in the free trade equilibrium. Write a mathematical expression of the consumption possibility frontier for Colombia.

Answer 1

1) Maximum possible quantity of beef in Colombia=Labour Force/per unit labour required for one unit for beef

Maximum possible quantity of beef in Colombia=1,600,000/4=400,000

2) opportunity cost of beef in Mexico= 4/2=2

So autarky price ratio in Mexico=2/1

3) Opportunity cost of beef in Colombia=4/8=0.5

Opportunity cost of beef in Mexico=4/2=2

So Colombia has comparitive advantage in beef and mexico in fish.so Colombia will specialize in beef and mexico in fish.

Let say,Without specializing/absence of trade, Columbia will use half workers in beef and half in fish.

So beef=200,000

Fish=100,000

When it specialize/ with trade, it use all workers in beef and then trade beef to buy fish.

Beef=400,000

Let say it trade half of the beef to get fish.

Exchange price ,4 beef =4 fish

Or 1 beef = 1 fish

So after trade, Colombia will have,

Beef=200,000

Fish= 200,000

So comparing to without specialize, Colombia has 100,000 more fish with same number of beef with specializing.

4) maximum quantity of beef with specializing=400,000

Exchange rate=1 beef for 1 fish.

Consumption possibility equation.

400,000=B+F