Econ 4364 (Problem Set 1)
by Yao Amber LI
ECON4364 International Trade and Investment
Problem Set 1
------------------------------------------------------------------------------Part I. Multiple Choices
The Ricardian Model:
1) The Ricardian theory of trade demonstrates that
A) Trade between two countries will benefit both countries.
B) Trade between two countries may benefit both regardless of which good each
exports.
C) Trade between two countries may benefit one but harm the other.
D) Trade between two countries may benefit both if each exports the product in
which it has a comparative advantage.
E) None of the above.
2) Consider the following two-country world economy:
Unit Labor Requirements (Hours)
Cloth
TV
Home
Foreign
1
2
20
30
What of the following statement(s) is (are) true:
A) Neither country has a comparative advantage.
B) Foreign has a comparative advantage in cloth.
C) Home has a comparative advantage in TV.
D) Home has an absolute advantage in TV.
E) None of the above.
3) Given the information in the above table, if wages were to double in Foreign, Foreign
should (assuming complete specialization in both countries)
A) Export TV;
B) Import cloth;
C) Import both cloth and TV;
D) A and B;
E) None of the above.
4) Given the information in the above table, if the world equilibrium relative price of TV
(to cloth) is 18, then
A) Both countries can benefit from trade with each other.
B) Only Home produces and exports cloth.
C) Only Foreign produces and exports TV.
D) All of the above.
E) None of the above.
5) According to the Ricardian trade model, a country that completely specializes as a
result of trade will find its consumption bundle …
A) on its trade-partner’s production possibilities frontier;
B) inside its trade-partner’s production possibilities frontier;
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Econ 4364 (Problem Set 1)
by Yao Amber LI
C) outside its production possibilities frontier;
D) on its production possibilities frontier;
E) inside its production possibilities frontier.
Part II. Long questions
The Ricardian Model:
Question 1 (R1)
Consider the following two-country world economy:
Unit Labor Requirements (Hours)
Computers
Cars
U.S.
100
100
Mexico
300
150
(a) What is the marginal cost of a computer (in terms of cars) in each country?
(b) Demonstrate (quantitatively) that a country with absolute productivity advantage in a
product may find its production more costly than in the unproductive country?
(c) Explain in words that trade produces cheaper goods, even in the unproductive country
(i.e. Mexico).
Question 2 (R2)
Home has 500 units of labor available. It can produce two goods, stationery and toys. The
unit labor requirement in stationery production is 1, while in toy production it is 2.
(a) Graph Home’s production possibilities frontier (with quantities of stationery on the
vertical axis). Label the slope and the intercepts clearly.
(b) What is the opportunity cost of stationery in terms of toys?
(c) In the absence of trade, what would be the price of stationery in terms of toys?
Question 3 (R3)
Home is described in Question 2. There is now another country, Foreign, with a labor force
equal to 1,200. Foreign’s unit labor requirement in stationery production is 3, while in toy
production it is 4.
(a) Construct the world relative supply of stationery (in terms of toys) (with the relative
price of stationery on the vertical axis).
(b) Now suppose that world relative demand is QS/QT = PT/PS. Graph the relative demand
curve along with the relative supply curve.
(c) What is the world equilibrium relative price of stationery? What is the world equilibrium
relative quantity of stationery?
(d) Describe the pattern of trade.
(e) Suppose that instead of 500 units of labor, Home has a disaster and only 300 units of
labor are left as a result. Find the equilibrium relative price and relative quantity of
stationery.
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