Chapter 2
INTERNATIONAL ECONOMICS EXERCISE
Exercise 1
Assume that there are two countries producing two goods including rice and steel
as bellowed:
a.
b.
c.
d.
e.
f.
g.
Singapore
Russia
Rice (h/ton)
4
4
Steel (h/ton)
8
16
Identify comparative advantage of each nation
Identify and explain the pattern of trade between Singapore and Russia.
Identify the range of international rate of exchange that brings about mutual
benefit?
Would trade occur if Psteel/Price = 2.5?
Would trade occur if Price/Psteel = 5?
If 1 ton of steel can be exchanged for 3 tons of rice, calculate gains of each
country in term of labor time when exchanging 1 ton of steel? Which
country gains more?
If two nations exchange 1steel for 3.5 tons of rice, identify gains of each
nation in term of rice?
Exercise 2
Two nations France and Russia produce two products, fridge and cloth.
France
Russia
Fridge (unit/hour)
6
6
Cloth (m/h)
54
42
a. Identify basis for and pattern of trade between France and Russia.
h. Identify the range of international rate of exchange that brings about mutual
benefit?
c. If two nations exchange 1 fridge for 10 meter of cloth, identify gains of each
nation.
d. If two nations exchange 2 fridge for 15 meter of cloth, identify gains of each
nation in term of meter of cloth.
e. At which rate of exchange, gains of two nations are equal.
Exercise 3
Chapter 2
Consider the following hypothetical data on labor requirements in Leinster and Saxony,
the only two countries in “the world”.
Labor needed to make one loaf of bread
Labor needed to make one telephone
In Leinster
3 hours
9 hours
In Saxony
4 hours
20 hours
1. #t.
a. Which country, if any, has an absolute advantage in bread? In telephones?
Which country has a comparative advantage in bread? In telephones?
b. Is there a basis for trade between Leinster and Saxony? Explain.
c. What price rations (telephones per loaf) are possible with free trade?
2. #t.
a. If the two countries agree to trade goods at a price of one telephone for four
loaves of bread, who will export bread? Who will export telephones? Explain.
b. Which country, Leinster or Saxony, will get the higher benefit at the rate of
exchange mentioned in part a.
Exercise 4
When fully utilizing all of the resources, Vietnam and China can produce apples or
bananas as follows:
Apples (‘000s tons)
Bananas (‘000s tons)
Vietnam
160
800
China
400
600
a. Construct PPFs of Vietnam and China and illustrate those PPFs on
diagrams.
b. Identify opportunity costs of producing apples and bananas of each
country?
c. Assume that in the absence of trade, Vietnam produces 400,000 tons of
bananas and 80,000 tons of apples while China 300,000 tons of bananas
and 200,000 tons of apples. How much gains of each country in the
presence of trade, given the international rate of exchange Pa/Pb = 2 (a:
apple and b: banana)