international economics 16
complete three econ questions below.
2. Suppose the world is divided into two regions, the Organization of Coffee Exporters (OCE) and the Club of Coffee Importers (CCI). Both economies are roughly the same size. The diagrams below represent the domestic markets for coffee in each region plus the world market (prices are in U.S. dollars per kg.):
| a. Show how to measure the “gains from trade” in each region using these diagrams. Who are the winners and who are the losers in each country? Do both countries get net gains? Or does one country gain at the expense of the other? Analyze and explain. |
b. Suppose that bad weather in the OCE reduces the supply of coffee. Analyze the effects graphically on the world price and on economic welfare in both regions (i.e., who gains or loses)?
c. Finally, suppose that health-conscious consumers in the CCI countries decide to drink more herbal tea and less coffee. Analyze the effects graphically as in part b.
3. Use the Ricardian trade to analyze trade between two countries, Germany and Poland, each of which can produce two goods, chemicals (C, measured in liters) and steel (S, measured in kilograms with labor requirements as shown in the following table:
Hours of labor per unit of output
|
Chemical |
Steel |
|
|
Germany |
1 |
3 |
|
Poland |
4 |
5 |
a. What would be the relative price of chemicals (Pc /Ps) in each country in autarky? In what a unit is this relative price expressed? How does this relate to the concept of “opportunity cost”? Which country has the comparative advantage in each commodity?
b. Suppose that German wages are €20 per hour (where € = euros) and Polish wages are €10 per hour (also measured in euros for convenience). Using the formula that price = (wage × labor hours), determine whether trade based on “absolute advantage” (lowest price) will follow comparative advantage. Does Poland get an overall competitive advantage over Germany from its lower wage? If so, in which product? Details are in the following documentation
Hint: Take the above hours of labor per unit of output and convert them to prices by multiplying the wage times the labor hour. Then consider with different prices, who would export and who would import the goods.
4. Answer the following questions based on this diagram:
Show the line segments to answer the questions below (e.g. JH or FE)
a.What are the quantities produced in autarky? with free trade? Show with the letters provided
b.What are the quantities consumed in autarky? with free trade?
c.What are the volumes (quantities) of imports and exports with free trade?
d.In which good does the country have a comparative advantage in?
e.What is the meaning of the slope of the line FE? In what units is this slope measured?
f. What would be the meaning of the slope of a line drawn tangent to the production possibility frontier at point G? Why would this line be steeper than line FE? (HINT: in which good does this country have a comparative advantage)?
