Tibet - yak fat 0 2 4 6 8 peacock beaks 4 3 2 1 0 India yak fat 0 1 2 3 4 peacoc

Question

Tibet - yak fat                               0          2          4          6          8

peacock beaks                   4          3          2          1          0

India

yak fat                               0          1          2          3          4

peacock beaks                   16        12        8          4          0

A) Find the opportunity cost of each good to each country. (20 points)

B) Who has the comparative advantage for each good? (10 points)

C) If both countries started in the middle, what are the gains to trade? (10 points)

D) What is the range for the terms of trade for each good? (10 points)

3.   Answer True or False for each of the following. 3 points each.

International trade benefits both partners, though not necessarily all citizens.

Absolute advantage determines trade specialization.

Tariffs are generally preferred by economists over quotas.

The U.S. has a large trade deficit with China, although its size is exaggerated.

Most American economists support at least relatively open trade.

Over time the terms of trade tend to move against final goods.

International trade typically increases competition and efficiency in an economy.

If a country is better at making all goods than another country there is no room for trade between the two.

The industrial world currently has the most open trade it has ever had.

Foreigners own more of the national debt today than 40 years

4. Answer each of the following:                                                                              20 points

What is the opportunity cost of 1 pair of shoes to Italy?

What is the opportunity cost of 1 pair of shoes to Portugal?

Who has the comparative advantage at shoe production?

Who has the comparative advantage at wine production?

Explanation / Answer

1. data is not clear

3. a. International trade benefits both partners, though not necessarily all citizens - True

International trade provide goods to consumers at cheaper rates but it does not benefit the domestic producers. Some gains from trade while some loose from this.

b. Absolute advantage determines trade specialization - False

Comparative advantage determines the trade specialization of countries.

c. Tariffs are generally preferred by economists over quotas - True

Tariffs increases the revenue of government and protect the domestic industries while quota only restrict the quantity of imports.

d. The U.S. has a large trade deficit with China, although its size is exaggerated - False

e. Most American economists support at least relatively open trade. - True

f. Over time the terms of trade tend to move against final goods. - False

g. International trade typically increases competition and efficiency in an economy - True

Trade increases exports and imports of different countries and the country who has comparative advantage in the production of certain good exports that good and import other good. It leads to efficiency in the countries and increases competition among countries.

h. If a country is better at making all goods than another country there is no room for trade between the two - False

A country always have one commodity in which it has comparative advantage over the other country. Country has absolute advantage in the production of all goods but not have comparative advantage. So, there is need to trade for development.

4. Incomplete question

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