Question

1.

The US and Germany both produces beef and computers. In one day, the US can produce either 500 pounds of beef or 200 computers. Germany on the other hand can produce 250 pounds of beef and 500 computers

Daily US Productivity
Beef (lbs)	Computers
500	0
375	50
250	100
125	150
0	200

Daily Germany productivity
Beef (lbs)	Computers
250	0
200	100
150	200
100	300
50	400
0	500

1a) what is the pre-trade (autarkic) price of computers in the US? _______________________

1b) What is the pre-trade (autarkic) price of computers in Germany? ____________________

1c) Which country has comparative advantage in producing computers? __________________

1d) Going by Ricardo, which country should specialize in computer production? _______________________

1e) If the US and Germany decide to trade with each other, what will be the range of the international trade price of computers ?

_______________________________________________

1f) If the negotiated trade price is 1 computer for 1 pound of beef and Germany decides to keep 300 computers at home and sell the rest, how many pounds of beef can it get in exchange? _______________________________

1g) Based on your answer in part (e), does Germany gain by trading computers with the US? If so, how? Explain.

2.  

Suppose that all goods are made with two factors, labor and capital. The table below shows the total endowments of each factor in the U.S. and Canada.

Endowment for Labor and Capital

	US	Canada
Workers	200	40
Machines	40	16

2a) Which country has a relative abundance in labor? Which country has capital abundance? How do you know?

2b) What should be the direction of specialization and trade for the US? what should be the direction of trade for Canada? Explain why. Which theory are you utilizing to answer the question?

Answer 1