Q1) In an imaginary country there are only 3 goods Food, Education andhealth.

The following table shows the prices andquantities producedof these goods in 2000, 2018, and 2019

200020182019

PQP.QPQ

Food1.005001.006001.05590

Education5.0030010.0020010.50210

Health.0.703000.804000.75420

A typical familybasket is:5Food 3Education, and 3Health.

1. Compute the consumer price index (CPI) for the three years, using 2000 as the base year. (1.5 Marks)

2. Estimate the inflation between 2018 and 2019. (Based on CPI). (1.5 Marks)

Q2 )The table below shows the production possibilities of two countries, X and Y, of two goods, A and B, given a fixed amount of resources and particular technology. (For country X: a worker can produce per month 78A or 26B. For country Y a worker can produce per month Y: 96A or 48B).

A B

X 78 26

Y 96 48

1. Which country has the absolute advantage in A, and which country has the absolute advantage in B? (1 Mark)

2. Calculate X's opportunity cost of A in terms of B (1 Mark)

3. If the two countries were to specialize and trade with each other, indicate and explain which country would import A. (1Mark)

4. Assume the countries decide to specialize and trade and settled on a trading price of 2.5 A per B. Explain why the country that specializes in B would experience gains from trade. (1 Mark)