Assignment #1, Econ 2010, Spring 2018 STUDENTS WHOSE LAST NAME BEGINS WITH I, J.
ID: 1150281 • Letter: A
Question
Assignment #1, Econ 2010, Spring 2018 STUDENTS WHOSE LAST NAME BEGINS WITH I, J...Q One of the most well-known propositions from microeconomic theory is that there may be gains from international trade. This proposition dates back to the early 1800's (if not earlier), Let's take a look at the argument David Ricardo made. advantage," then the total output from Ricardo showed that if two countries have "comparative tion." Let's suppose our two the two countries could be increased if the countries "specialized in produc countries are called England and Portugal. Wine and cloth can be produced in both countries. Now that initially each country is using some of its resources to produce wine and some to produce cloth. We will assume that if a country moves some of those resources out of the production of wine and into the production of cloth, the production of wine in the country will go down and the production of cloth will go up. So can increase its production of cloth by 1 unit by decreasing its production of wine by so much. That decrease in its production of wine is the rate of producte transformatien (of wine into cloth; so wine is good 2 and cloth is goo OK, suppose this rate of product transformation for England is 4. )Then in order for England to y Lmillion square meters it must decrease its production of wine by 4 increase its million barrels. And vice versa, ie. if England decreases its production of cloth by 1 million sq m. its All right, now suppose that Portugal's rate of product transformation (also wine into cloth) is 7 Then in order to increase its production of cloth by 1 million square meters reduce its production of wine by 7 million barrels. And again, vice versa. hascomparative advantageinthe production ofone ofthetwo goods. One thing that this implies you understand this. So fill in the blanks. Use the attached answer sheet. Well, if two countries have different rates of product transformation for two goods, then each is that the total quantity of wine produced by the two countries can be increased with the total quantity of cloth produced by the two countries unchanged. The first part of your assignment is to show that PART A Suppose that England increases it production of -1 by one unit. And suppose that Portugal decreases it production of that good by one unit. Then total production by the two countries will be wine What happens to the total production of the other good? Well England's production of -2- will go down by3- while Portugal's production will go up by4. Therefore, the total production of that good will-5 . So can the populations of both countries consume more of one of the two goods and the same amount of the other if this change in production occurs and there's trade between the two countries? 6- (circle yes or no) How do you figure? Well what if England gives Portugal -in exchange for8-. Thern the populations of both countries will have the same amount of the good in blank #7 to consume. But people in England will have- 9… more units of the good in blank #8 to consume while the people of Portugal will have-10-more units of that good to consume. And this shows what you claimed in #6 So what's the moral to this fascinating exercise? The people of two countries can benefit from
Explanation / Answer
Suppose that England increases it production of (1) cloth by one unit. And suppose that Portugal decreases it production of that good by one unit. Then total production by the two countries will be unchanged.
What happens to the total production of the other good? Well England's production of (2) wine will go down by (3) 4 units while Portugal's peoduction will go up by (4) 7 units. Therefore the total peoduction of that good will go (5) up.
So can the population of both the countries consume more of one of the two goods and the same amount of the other if this change in production occurs and there's trade between the two contries? (circle yes or no) (6) yes.
How do you figure? Well what if England gives Portugal (7) cloth in exchange for (8) wine. Then the population of both countries will have the same amount of the good in blank #7 to consume. But people in England will have (9) 7 more units of the good in blank #8 to consume while the people of the Portugal will have (10) 4 more units of that good to consume. And this shows what you claimed in #6.
The moral of this exercise is: The people of two countries can benefit from the international trade by having comparative advantage in the production of one of the two goods.