Question

Consider the following Ricardian model.

MPL                           Labor Supply

Pens           Pencils

       France         1/10              1/15                     90

       Germany     1/12              1/20                     120

Answer the following questions and show your steps. For the T/F questions, please explain why they are T/F.

1. Draw the PPF for France. Label your picture, and calculate the slope of the PPF, (4 points)

2. France has the absolute advantage in both goods.

3. France has the comparative advantage in pens.

4. If the labor supply increases in France, France is more likely to have a comparative advantage in pencils since the production of pencils requires more labor.

5. In moving from closed-economy to free trade, France produces fewer pens.

6. Under free trade, the relative price of pens to pencils (P_pens^T/P_pencils^T) cannot exceed 2/3.

Don't copy others please, they all did wrong answers.

Answer 1

Ans (1) the slope of PPF for France will be pen/ pencil :

1/10*15/1= 3/2 or 1.3

The PPF will be straight line on the X axis pens produced by country is shown and on Y axis pencil are shown.

Ans 2) yes France has absolute advantage in producing both the products as the labour used by France is less then Germany is the production per labour in France is more then Germany that's why France has absolute advantage in producing both.

Ans 3) yes if we are going to compare both countries comparative advantage then we will see that France has comparative advantage in producing pen while Germany has comparative advantage in producing pencils in this we are going to see the ratio of one production to other production of same country or we can say that the opportunity cost of producing the product.

Ans 4) false , if the supply of labour increase then the production of pen will increase because of the efficiency in producing pen not pencil if the production of pencil is increased because of increase in labour supply in the country then the country will face loss more output can be produced by using less labour ie pen.

Ans 5) False, if country is moving from closed economy to free trade economy then France will produce more pen because France can produce more pen with less labour and this can be traded for pencil as it has having comparative advantage in producing pen while Germany will participate in trade as it has comparative advantage in producing pencil rather then pen so by trading both country will face a new PPF .

Ans 6)false, under free trade the relative price can't exceed 1.5(3/2) if relative price is less then 2/3 then trade will not take place in the economy.