QUESTION 1

In a conversation about classical trade theories, your course mate says, "If Mauritius is better than Zimbabwe at producing Salt and Coal, then Mauritius is better off not trading with Zimbabwe". Writte a well thought out and argued response to youur course mate by evaluating the validity of the statement made.

QUESTION 2

(i) Discuss the conditions that may give rise to trade between nations

Assume the following:

Two nations, Punchi and Lunchi.

There are two commodities produced in the two nations;

chickens and computers

Punchi has comparative advantage in producing chickens and Lunchi has a comparative advantage in producing computers.

Both nations have different factor endowments

Both nations have different tastes

Production occurs under increasing cost condition

There are no transport costs, no tariffs or other obstructions to trade

(ii) Prove, with the aid of well-drawn and explained diagrams, that mutually beneficial trade between the two nations is possible.