From Dec 7 2009 Final – Long Problem 2 – Trade with Identical Populations First, write out what’s given to you,
(a) Suppose that there is no trade (Autarky). What is per-capita consumption of each good in each country? Per capita consumption under Autarky
(b) What are the prices of pizza in each country? Who has a comparative advantage in producing beer? In pizza? Prices. I’ll calculate prices of each product in terms of the other. The pricing unit is called the numeraire. Price in terms of beer
Intuition: the price of a pizza in America is 1 beer. Given that a worker can either produce 4 beers or 4 pizzas, if producers of one good were to exchange it for the other, they’d exchange it at the exchange rate of one-to-one. In Belgium, the worker can produce 6 beers or 2 pizzas (hmmm, Trappist), with pizza more difficult to produce relative to beer, pizza costs more. Price in terms of Pizza
Intuition: If Americans want to exchange pizza for beer, they’d need to give 1.5 pizzas for a single beer. Belgians would exchange 1/3 a pizza for a single beer. Comparative Advantage. Comparative advantage is determined by relative prices.
Intuition: Imagine you were an American with the ability to cheaply ship pizzas to Belgium. You see that in the States you could get (only) 1 beer for a single pizza. But if you ship those pizzas over to Belgium you’d get 3 beers! A wonderful arbitrage opportunity that doesn’t exist for pizzas going from Belgium to America. (c) Now suppose that the world opens to free trade. If countries fully specialize according to their comparative advantage what is the world production of beer and pizza? With this level of world production, what should the price of a pizza be in terms of beer? America & Belgium Under Free Trade
The price of pizza (in terms of beer) has been equalized to 1.5. That is, it takes 1.5 beers to buy a single pizza. (d) With the patterns of production in each part, what are the wages in each country in terms of beer? What is per capita consumption of beer and pizza in each country? How does this differ from consumption under autarky. Wages, Per-Capita Consumption under Autarky
Wages, Per-Capita Consumption with Free Trade
Wages
Per-Capita Consumption
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Teaching - Curtis Kephart > Econ 100B Intermediate MacroEconomics (Homework and exam examples) > International Trade - Previous Exam Questions >