Econ 1102 Recitation 8 Gina Pieters Recitation 8 A B C D Comparative and Absolute Advantage Terms of Trade Trade Equilibrium Trade Barrier A Comparative and Absolute Advantage Argentina production possibilities Soybeans Bolivia production possibilities A B C D 30 20 10 0 Soybeans 2 4 6 Petroleum 0 Petroleum 0 A B C D 18 12 6 0 10 20 30 Suppose there s no trade and both countries produce plan B What is the total production of goods Both countries open trade The country with the comparative advantage in soybeans produces at A the country with the comparative advantage in petroleum produces at C What are the gains from trade B Terms of Trade What are the maximum and minimum terms of trade in the above example Price of Tshirts Suppose terms of Trade set 1 petroleum 1 soybeans and Argentina consumes 23 soybeans What are the rest of the consumption plans 8 5 C Trade Equilibrium 2 Pakistan 2 8 5 Thousands of Tshirts Page 1 of 3 Econ 1102 Recitation 8 Gina Pieters 10 Demand P 10 Q 0 Supply P Q Suppose Pakistan is in isolation from the rest of the world no imports or exports What is the equilibrium price How many t shirts are produced and consumed What is the consumer producer and total surplus Suppose Pakistan trades with the rest of the world The world price is 2 What is the equilibrium price How many t shirts are produced and consumed How many t shirt are imported exported What is the consumer producer and total surplus D Trade Barriers Suppose Pakistan trades with the rest of the world The world price is 2 Suppose Pakistan imposes a tariff of 1 per shirt paid to the government What is the equilibrium price How many t shirts are produced and consumed How many t shirt are imported exported What is the consumer surplus producer surplus government revenue and total surplus Suppose Pakistan trades with the rest of the world The world price is 2 What is the lowest tariff the Pakistani government can charge to stop imports Page 2 of 3 Econ 1102 Recitation 8 Gina Pieters Practice Questions Germany production possibilities A Belgium production possibilities B C D Chocolate 15 10 5 0 Beer 10 20 30 0 A B C D Chocolate 15 10 5 0 Beer 4 8 12 0 1 Who has the comparative advantage in making chocolate Who has the comparative advantage in brewing beer 2 What are the minimum terms of trade 3 What are the maximum terms of trade 4 Suppose terms of trade are 1 chocolate for 1 5 beers Suppose each country completely specializes in the good that they have the comparative advantage in and Germany consumes 21 beers after trade What are the new consumption plans Price of apples 12 10 8 Quantity of apples Demand P 14 0 4Q 5 10 15 Supply P 6 0 4Q 5 Suppose Liechtenstein is in isolation What are consumer and producer surplus 6 Now Liechtenstein opens up for trade Suppose the world price is at 12 and Liechtenstein is too small to affect world prices What is the new equilibrium price What is consumer surplus producer surplus and total surplus What are the imports and exports 7 Now Liechtenstein opens up for trade Suppose an import tariff of 1 is levied when the world price is 8 What is the new equilibrium price What is consumer surplus producer surplus government revenue and total surplus What are the imports and exports Page 3 of 3
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