Name: Awais Dastgeer ID: LY2020031 Course Name: International Trade

Exercise 1

 1. the following table shows the number of days of labor required to produce 1 unit of
output of computers and wheat in France and Germany:
 (a) calculate the autarky price ratios
 (b) which country has a comparative advantage in computers? Why?
 (c) if the terms of trade are 1C:22W, how many days of labor does France save
per unit of its import good by engaging in trade? How many days does Germany
save per unit of its import good?
 (d) if the terms of trade are 1C:24W, what is the result?
 (e) what can be said about the comparative distribution of the gains from trade
between France and Germany in (d) and (c), why?

a. Calculate autarky price ratio

Computers Wheat
France 100 days 4 days
Germany 60 days 3 days

Answer: Autarky price ratio

Autarky Price ratio

1C:25W / 0.04C:1W
1C:20W / 0.05C:1W

b. France has comparative advantage on producing wheat because its opportunity cost in
producing wheat is less than Germany. While, Germany has comparative advantage on
producing computer since its opportunity cost is less than France.
 c. Term of trade 1C:22W
Computers Wheat
France 100 days 4 days
Germany 60 days 3 days

Answer:

Autarky Price ratio

1C:22W (gain)
1C:25W 3W = 12 days
1C:20W 2W = 6 days

d. Term of trade 1C:24W

Computers Wheat
France 100 days 4 days
Germany 60 days 3 days

Answer

Autarky Price ratio

1C:24W (gain)
1C:25W 1W = 4 days
1C:20W 4W = 12 days

e. Gain from Trade:

France gain less benefit from 12 days to 4 days when the term of trade change from
1C:22W to 1C:24W. When the terms of trade become closer to a country’s autarky
price ratio, the gain for that country from international trade become smaller.
 Exercise 2

 2. the following table shows the number of days of labor required to produce a unit of
textiles and autos in the United Kingdom and the United States:
 (a) Calculate the number of units of textiles and autos that can be produced from 1
day of labor in each country.
 (b) Suppose that the US has 1,000 days of labor available. Construct the
production-possibilities frontier for the US.
 (c) Construct the US consumption-possibilities frontier with trade if the terms of
trade are 1 auto: 2 textiles
 (d) Select a pretrade consumption point for the United States, and indicate how
trade can yield a consumption point that gives the United States greater
consumption of both goods.

Textiles Autos

United Kingdom 3 days 6 days

United States 2 days 5 days

2. United Kingdom and United States

a. Calculate number of unit per 1 day of labor

Textiles Autos
United Kingdom 0.33 unit/day 0.17 unit/day
United States 0.5 unit/day 0.2 unit/day

b. Construct PPF for US

Textiles Autos
500 0
300 80
250 100
200 120
0 200
 Textile PPF of
s US
600
500

400
PFF,
300 1A:2.5T
200

100

0
0 50 100 150 200 250

c. Construct PPF of US if 1A:2T

Textile
PPF and CPF of
s US
600
500

400

300
CFF,
200 PFF, 1A:2T
100
1A:2.5T

0
0 50 100 150 200 250 300
Autos

D. Each point on the PPF line is a US pre-trade consumer point. When the United States trade
with the United Kingdom its point of consumption is no longer PPF. On the CPF line is the new
consumption point. The CFF line is above the PFF line, so when the United States enters trade it
can consume more.

3.
US has 1000 days of labor
US at autarky at 1A:10T
Textiles = 0.5 x 900 = 450 units
Autos = 0.2 x 100 = 20 units

US produce specialized product

Textiles = 0.5 x 1000 = 500 units

Term of trade 1A:2T; trade 40 textiles for 20 autos

Textiles = 460 unites
Autos = 20 unites

Gain from trade

Textiles = 10 units
Autos = 0 units
4. “If United States productivity growth does not match that of its trading partners, the
United States will quickly lose competitiveness internationally and cannot export
products and its standard of livelihood will decrease."
This is not the scenario. If growth in United States productivity falls, it could lose
absolute profit, but does not necessarily lead to the United States losing its
competitive edge. The United States may not have absolute advantages but, as long as
its opportunity cost for one good is lower than that of the other, it still has
comparative advantage over the other product. Therefore the United States still has
comparative advantages to be able to export its specialist products.