1. Consider a world consisting of two countries, Continentia (A) and Islandia (B). Each country has 2000 units of labor, the only input. In Continentia (country A), it takes 8 units of labor to produce a computer (product X) and 4 units of labor to produce a unit of textiles (product Y). In Islandia (country B), it takes 5 units of labor to produce a computer (product X) and 4 units of labor to produce a unit of textiles (product Y). a. Sketch (Draw): i. production possibilities frontier for Continentia (A). ii. production possibilities frontier for Islandia (B). b. Determine/Calculate: i. the opportunity cost of producing a computer (X) in Continentia (A). ii. the opportunity cost of producing a unit of textiles (Y) in Continentia (A). c. Determine/Calculate: i. the opportunity cost of producing a computer (X) in Islandia (B). ii. the opportunity cost of producing a unit of textiles (Y) in Islandia (B)? d. In autarky: i. what would be the relative price of computers (X) in Continentia (A)? ii. what would be the relative price of computers (X) in Islandia (B)? e. Which country has a comparative advantage in producing computers (X)? Why? f. Which country has a comparative advantage in producing textiles (Y)? Why? g. If in autarky, production of textiles (Y) in Continentia (A) = 200, how much production of computers (X) in country A? h. If in autarky, production of computers (X) in Islandia (B) = 200, how much production of textiles (Y) in country B? i. If Continentia (A) specialize according to comparative advantage, how much computers (X) and how much units of textiles (Y) will Continentia (A) produce? j. If Islandia (B) specialize according to comparative advantage, how much computers (X) and how much units of textiles (Y) will Islandia produce? k. Within what limits will the terms of trade lie if specialization and trade occur? 1. Suppose Country A and Country B agree to a terms-of-trade ratio of 1X=1.5Y (1 computer = 1.5 textile). i. Draw the terms-of-trade line in the diagram a(i) for country A. ii. Draw the terms-of-trade line in the diagram a(ii) for country B. m. Assume trade occur and country A consumes the same amount of good Y as autarky (200 unit TOT textile) and international term of trade is is(%) = 1.5Y (same as Question 1). Determine: . i. how much consumption of computers (X) in country A? ii. how much consumption of computers (X) in country B? iii. how much consumption of textiles (Y) in country B? Draw the trade triangle: i. Country A in a(i). ii. Country B in a(ii). n. 1. Consider a world consisting of two countries, Continentia (A) and Islandia (B). Each country has 2000 units of labor, the only input. In Continentia (country A), it takes 8 units of labor to produce a computer (product X) and 4 units of labor to produce a unit of textiles (product Y). In Islandia (country B), it takes 5 units of labor to produce a computer (product X) and 4 units of labor to produce a unit of textiles (product Y). a. Sketch (Draw): i. production possibilities frontier for Continentia (A). ii. production possibilities frontier for Islandia (B). b. Determine/Calculate: i. the opportunity cost of producing a computer (X) in Continentia (A). ii. the opportunity cost of producing a unit of textiles (Y) in Continentia (A). c. Determine/Calculate: i. the opportunity cost of producing a computer (X) in Islandia (B). ii. the opportunity cost of producing a unit of textiles (Y) in Islandia (B)? d. In autarky: i. what would be the relative price of computers (X) in Continentia (A)? ii. what would be the relative price of computers (X) in Islandia (B)? e. Which country has a comparative advantage in producing computers (X)? Why? f. Which country has a comparative advantage in producing textiles (Y)? Why? g. If in autarky, production of textiles (Y) in Continentia (A) = 200, how much production of computers (X) in country A? h. If in autarky, production of computers (X) in Islandia (B) = 200, how much production of textiles (Y) in country B? i. If Continentia (A) specialize according to comparative advantage, how much computers (X) and how much units of textiles (Y) will Continentia (A) produce? j. If Islandia (B) specialize according to comparative advantage, how much computers (X) and how much units of textiles (Y) will Islandia produce? k. Within what limits will the terms of trade lie if specialization and trade occur? 1. Suppose Country A and Country B agree to a terms-of-trade ratio of 1X=1.5Y (1 computer = 1.5 textile). i. Draw the terms-of-trade line in the diagram a(i) for country A. ii. Draw the terms-of-trade line in the diagram a(ii) for country B. m. Assume trade occur and country A consumes the same amount of good Y as autarky (200 unit TOT textile) and international term of trade is is(%) = 1.5Y (same as Question 1). Determine: . i. how much consumption of computers (X) in country A? ii. how much consumption of computers (X) in country B? iii. how much consumption of textiles (Y) in country B? Draw the trade triangle: i. Country A in a(i). ii. Country B in a(ii). n
