Assignment covers Chapter 2 Material
In class, we used the law of comparative advantage to model trade between two people on an island. Comparative advantage can also be used in the role of modeling international trade. Answer the following questions using the information provided below.
| U.S.
Production Possibilities |
France's Production Possibilities |
|||||
| Bread | Wine | Bread | Wine | |||
| A | 900 | 0 | G | 450 | 0 | |
| B | 720 | 100 | H | 360 | 90 | |
| C | 540 | 200 | I | 270 | 180 | |
| D | 360 | 300 | J | 180 | 270 | |
| E | 180 | 400 | K | 90 | 360 | |
| F | 0 | 500 | L | 0 | 450 | |
Questions:
1) Draw the production possibilities curves for the U.S. and France (on separate graphs). Which country or countries exhibits increasing opportunity cost?
2) Suppose, in autarky, the U.S. would have chosen to produce at point C and France at point I. What is the total amount of bread and the total amount of wine produced by the two countries?
3) Which country has the absolute advantage in wine? In bread? Calculate the opportunity costs of producing wine in each country. Which country has the comparative advantage in wine production?
4) If each country specializes (complete specialization), what is the total amount of bread and wine produced by the two countries?
5) After complete specialization, both countries agree to this trade: 270 bread from the U.S. for 200 wine from France. What is the post-trade distribution of bread and wine, i.e. how much bread and wine will the U.S. and France end up with. Illustrate these post-trade allocations on the graphs from Question 1.