Question

EXERCISE 18.5 COMPARATIVE ADVANTAGE

Suppose that there are only two countries in the world, Germany and Turkey, each with four workers. Within a given time period, each worker in Germany can produce three cars or two televisions, and each worker in Turkey can produce two cars or three televisions.

1. Draw the feasible production frontier for each country, with televisions on the horizontal axis and cars on the vertical axis. In the absence of trade, what is the relative price of cars in each country?
2. Suppose that, in the absence of trade, Germany consumes nine cars and two televisions while Turkey consumes two cars and nine televisions. Mark these consumption points as G and T, respectively. Draw the feasible consumption frontier for each country in the absence of trade. Comment on the relationship between the production and consumption frontiers you have drawn for each country.
3. Now suppose Germany and Turkey start trading. What is the range of possible values for the world relative price of cars? If the world relative price of cars is P_C/P_TV = 1, in which good will each country specialize?
4. Now use the world relative price given above to draw the feasible consumption frontier of each country in the figures you have drawn. Use these figures to explain whether or not each country gains from trade.
5. What is the marginal rate of transformation between cars and televisions in each country? Explain the relationship between comparative advantage and the marginal rate of transformation between goods.

Answer 1