Week 2 Assignment
Week 2 (7) Trade and Comparative Advantage Chapter 3
Problem set
Exercise 2.1
Assume there are just two countries in the world, i.e. the European Union (EU) and the Rest of the World (RW). Both countries produce and consume 2 products: bicycles (b) and apples (a). Per bike, the EU puts in 3 hours of labour while the RW puts in 5. Per ton of apples, the EU needs 2 hours v. the RW 1 hour of labour. A further given is that the EU has 2400 hours of labour available v. RW 1600. The world relative demand has the following form: demand for bikes/demand for apples = price of apples/price of bikes.
Please answer the following questions:
a. How high are the opportunity costs of a bike in the EU and the RW in the absence of international trade? Also give the opportunity costs of a ton of apples in both countries. Which product will the EU be exporting?
Required hours of labour per product unit
| |Bicycles (unit) |Apples (ton) |
|EU (2400) |3 (800) |2 (1200) |
|RW (1600) |5 (320) |1 (1600) |
EU opportunity cost of bike (per unit) in terms of apples (in tons): 3/2 or 1.5 Opportunity cost of apples (in tons) in terms of bike unit: 2/3 RW opportunity cost of bike (per unit) in terms of apples (in tons): 5/1 or 5 Opportunity cost of apples (in tons) in terms of bike unit: 1/5 or 0.2
The EU will be exporting bicycles, because they possess a comparative advantage.
b. Draw the production possibility frontier for the EU.
L/a LB = 800 L/a LA = 1200 Slope: price B/A
c. What is the relative price of a bike in the EU in the absence of
Problem set
Exercise 2.1
Assume there are just two countries in the world, i.e. the European Union (EU) and the Rest of the World (RW). Both countries produce and consume 2 products: bicycles (b) and apples (a). Per bike, the EU puts in 3 hours of labour while the RW puts in 5. Per ton of apples, the EU needs 2 hours v. the RW 1 hour of labour. A further given is that the EU has 2400 hours of labour available v. RW 1600. The world relative demand has the following form: demand for bikes/demand for apples = price of apples/price of bikes.
Please answer the following questions:
a. How high are the opportunity costs of a bike in the EU and the RW in the absence of international trade? Also give the opportunity costs of a ton of apples in both countries. Which product will the EU be exporting?
Required hours of labour per product unit
| |Bicycles (unit) |Apples (ton) |
|EU (2400) |3 (800) |2 (1200) |
|RW (1600) |5 (320) |1 (1600) |
EU opportunity cost of bike (per unit) in terms of apples (in tons): 3/2 or 1.5 Opportunity cost of apples (in tons) in terms of bike unit: 2/3 RW opportunity cost of bike (per unit) in terms of apples (in tons): 5/1 or 5 Opportunity cost of apples (in tons) in terms of bike unit: 1/5 or 0.2
The EU will be exporting bicycles, because they possess a comparative advantage.
b. Draw the production possibility frontier for the EU.
L/a LB = 800 L/a LA = 1200 Slope: price B/A
c. What is the relative price of a bike in the EU in the absence of