Question

QUESTION 3

Assume function is as follow: C = 500 + 0.75Yd

a) Determine the national income if investment is 200.

b) Draw the national income equilibrium (consumption and saving curves) based on information in (a).

c) The following are some assumptions for an economy:

• Marginal propensity to consume (MPC) is 0.75.

• Autonomous consumption is RM5,000 million.

• Autonomous investment is RM2,500 million.

What is the level of national income which will achieve equilibrium?

d) Calculate the level of output or national income equilibrium for an open economy model.

C = 500 + 0.5Yd T = 100 G = 100 I = 100 X = 100 M = 50 + 0.2Y

QUESTION 2

1. What is meant by comparative advantage?
2. Assume country A can produce 100 TV sets and 50 cars and country B can produce 50 TV sets and 40 cars.

Determine the comparative advantage for country A and country B. Provide reasons why you say so.

Answer 1

Answer 2)

A) Given 2 different activities to be executed from same resources of inputs then individual or group manages to perform one of the activities more efficiently than other activities then it is said to have comparative advantage for that individual to produce former activity over the other activity.

In this advantage analysis we compare the opportunity costs that an individual has to forgo while working on other activity.

B)

Country A can produce 100 TV sets and 50 Cars with the same amount of resources provided

Country B can produce 50 TV and 40 Cars

Opportunity Cost for Country A to produce 1 Car is 2 Units of TV whereas Opportunity Cost for Country B to produce 1 unit of Car is 1.25 units of TV

Because for Country A 100TV=50Cars that is 2 TVs =1 Car similarly 1 TV sets=0.5 Cars

For Country B 50TV=40 Cars that is 1.25 TVs =1 Car similarly 1 TV set=0.8 Cars

Hence Opportunity Cost of producing 1 unit of Car is higher for Country A than that of Country B therefore Country B enjoys Comparative advantage in producing Cars

Opportunity Cost of producing 1 unit of TV is lower for Country A than that of Country A therefore Country A enjoys Comparative advantage in producing TV sets