1. Consider two neighboring countries, East and West, both able to produce gadgets (G) and food (F). West’s resources allow it to produce equal amounts of both goods, 300 or 300, if they used all of its resources on production of either. East’s resources allow it to produce either 400 units of food or 200 units of gadgets. Currently countries are self-sufficient, not trading with each other. West produces/consumes 150 units of food and 150 gadgets. East produces/consumes 100 gadgets and 200 units of food. 

a) (2 pts) Draw production possibilities frontiers (PPF) for East and West, with gadgets on the horizontal axis. Make sure to label intercepts and indicate the slope of the PPF for each country. Indicate each country’s current production point on the PPFs. 

b) (0.5 pts) What is the country's combined output of gadgets and food? 

 c) (1 pt) Which country has a comparative advantage in producing gadgets? …. In producing food? What criteria did you use to determine this? 

d) (1 pt) If countries chose to specialize, can they increase their combined output? Which countries should specialize in what? If so, how much can they produce (separately and combined)? 

e) (1 pt) Assuming countries decide to specialize, name possible desired consumption combinations for both, which would allow them to reach beyond their PPF. Indicate such points on the graphs above. (Hint: make sure their combined consumptions are not greater than the countries’ output). 

(1 pt) Use your suggested desired consumption points to determine quantities of goods that the countries would bring to the market. What will be the exchange ratio of gadgets to food, if only two of them participate in the marketplace? 

f) (2 pts) Suppose East, due to their advancement in technology, expanded their production capabilities and can now produce, on maximum, 300 gadgets (and 400 units of food as before). Reflect this change on the graph above. Based on your choice of desired consumption point for East, would they still be benefiting from trading with West? 

Depending on your answer, will West still have the incentive/or opportunity to specialize and trade or would it return to self-sufficiency? 

e) (Bonus, 0.5 pts) can you relate the hypothetical story described in this problem to current events surrounding global trade?