Problem Set 1

by


ECO 6936: Global Trade and Policy

Problem Set 1

 

Question 1

Costa Rica and Panama both produce avocados and bananas. Each country in endowed with a specific amount of labor and has a unit labor requirement for producing each product. Costa Rica is endowed with 14,000 units of labor, and Panama is endowed with 6,000 units of labor. The unit labor requirements are given as:

 

  Costa Rica Panama
Unit Labor Requirement for Avocados aA=0.70 aA=0.75
Unit Labor Requirement for Bananas aB=0.50 AB=0.25

 

Part (i): Construct each country’s PPF. Place the quantity of avocados (measures in thousands) on the horizontal axis and the quantity of bananas (measured in thousands) on the vertical axis.

Part (ii): Which country has the comparative advantage in the production of avocados?

Part (iii): Which country has the comparative advantage in the production of bananas?

 

Question 2

Consider two countries, the United States and Canada, that each produce only two goods, lumber and steel. Each country in endowed with a specific amount of labor and has a unit labor requirement for producing each product. The figure below depicts each country’s PPF. PPFU is the United States’ PPF, and PPFC is Canada’s PPF.

 

Part (i): Which country has theabsolute advantage in the production of lumber?

Part (ii): Which country has theabsolute advantage in the production of steel?

Part (iii): Which country has the comparative advantage in the production of lumber?

Part (iv): Which country has the comparative advantage in the production of steel?

Question 3

Consider two countries, the Portugal and Spain, that each produce only two goods, ham and cod fish. Each country in endowed with a specific amount of labor and has a unit labor requirement for producing each product. The figure below depicts each country’s PPF. PPFP is Portugal’s PPF, and PPFS is Spain’s PPF.

 

 

Part (i): Suppose that Portugal has 40available units of labor each week. What is Portugal’s unit labor requirement for producing units of ham?

Part (ii): Suppose that Spain’s unit labor requirement for producing cod fish is 0.40. How many units of labor does Spain have available each week?