Extension of trade theory: Practice Questions

Consider two countries, Country Alpha and Country Beta, that produce two goods: Computers and Textbooks. Assume that each country allocates the same amount of labour for production.

The output data is as follows:

• Country Alpha: 1,000 units of labour can produce 50 Computers OR 200 Textbooks.
• Country Beta: 1,000 units of labour can produce 30 Computers OR 150 Textbooks.

Based on the given information, which country has a comparative advantage in producing Computers, and which has a comparative advantage in producing Textbooks?

Countries A and B currently trade two goods, X and Y, with Country A holding a comparative advantage in good X and Country B in good Y. Now, suppose Country A experiences a significant brain drain, losing a large portion of its skilled labour force, while Country B heavily invests in education and infrastructure, improving its overall productivity across all sectors.

Which of the following is the most likely long-term consequence for the trade relationship between Countries A and B?

Country Z specializes in producing high-tech gadgets and Country W specializes in agricultural products, based on their existing comparative advantages. Suppose Country Z invests heavily in automation for agricultural production and discovers new genetically modified crops that significantly boost its yield, leading to a flatter production possibilities frontier (PPF) along the agricultural axis for a given amount of resource input.

How might this development affect Country W's long-term comparative advantage and the pattern of international trade?

Country Alpha and Country Beta produce two goods: Wheat and Cloth. The production possibilities for one unit of labour are as follows:

• Country Alpha: 20 units of Wheat OR 10 units of Cloth
• Country Beta: 15 units of Wheat OR 5 units of Cloth

Assume each country has 100 units of labour. Without trade, each country allocates half of its labour to producing Wheat and half to producing Cloth. If both countries specialize fully according to their comparative advantage and trade at a terms of trade of 1 unit of Cloth for 2.5 units of Wheat, what is the combined gain in total consumption of Wheat for both countries, assuming they maintain their pre-trade level of Cloth consumption?

Explain how globalization allows a country to better utilize its comparative advantage by focusing on specific production stages within a global supply chain.

Explain how the principle of comparative advantage facilitates mutually beneficial trade between two countries, even if one country is more productive in all goods.

Consider two hypothetical countries, Country A and Country B, that can produce two goods: Coffee and Textiles. The output produced per worker per month in each country is given below:

• Country A: 400 units of Coffee OR 800 units of Textiles
• Country B: 600 units of Coffee OR 900 units of Textiles

(a) Based on the information provided, determine which country has an absolute advantage in the production of Coffee and which in Textiles. Explain your answer.

(b) Calculate the opportunity cost of producing one unit of Coffee in both Country A and Country B. Based on your calculations, identify which country has a comparative advantage in Coffee and which in Textiles.

(c) Explain the principle of comparative advantage. Briefly describe how both countries can benefit from specialization and engaging in international trade.

Consider two countries, Country H and Country F, that produce two goods: Wheat (\( W \)) and Machines (\( M \)). Their linear Production Possibilities Frontiers (PPFs) are defined by the following maximum outputs:

• Country H: \( 200 \) units of Wheat OR \( 50 \) units of Machines.
• Country F: \( 120 \) units of Wheat OR \( 60 \) units of Machines.

(a) Explain the economic relationship between the absolute slope of a linear PPF and the marginal cost of production for the good measured on the horizontal axis. (1 point)

(b) Calculate the opportunity cost of producing \( 1 \) unit of Machine in both countries. Identify which country has a comparative advantage in Machines and explain why. (2 points)

(c) Suppose Country F adopts a new technology that doubles its maximum output of Wheat to \( 240 \) units, while its Machine output remains unchanged. Determine the new range of mutually beneficial terms of trade for \( 1 \) unit of Machine. (2 points)

(d) Explain the concept of globalization from an economic perspective and how it enables countries to utilize their comparative advantages more effectively. (2 points)