ECN 481/581, Winter 2006
Prof. Bruce Blonigen
NAME: ____ANSWER KEY______
QUIZ 2
Wednesday, February 1 - 20 points
Fill in the blank/short answer - may be more than one word. (1.5 points each)
1) Subsidizing exports and restricting imports is a basic principle of Mercantilism.
2) An depreciation of a country’s currency will make exports more (more or less) attractive to
other countries’ consumers.
3) Providing workers who lose their job to import competition some compensation to allow
transition to another job is often referred to as wage (or trade) insurance.
4) Autarky refers to a situation where the country does not trade internationally.
5) In the Ricardian model, absolute advantage determines wage rates.
For questions 6 & 7, refer to Panels A and B below which depicts Country X in autarky
equilibrium. (3 points for each)
6) Suppose that country X has a comparative advantage in gum relative to the rest of the world.
In Panel A draw a plausible trade equilibrium for country X in this situation using the typical
assumption of full employment, making sure to label the new level of production (B),
consumption (F) and utility (UF). Also draw and label the trade triangle.
7) In Panel B, now draw a situation where the country gains from international trade (exporting
gum and importing beer) over the autarky equilibrium at A even though in the trading
equilibrium there is a level of domestic production that represents unemployment.
Label the new level of production (B), consumption (F), utility (UF) and trade triangle.
Panel B
Panel A
Gum
Gum
B
Trade
Triangle
B
F
UF
A
Trade
Triangle
F
A
UF
UA
UA
Beer
Beer
ECN 481/581
NAME: ____________________________
Use the following information to answer questions 8-10 (2 points each):
Assume that we have a Ricardian world with two countries, Peru and Chile, and two
products, garlic (G) and breath mints (B). In Peru it takes 8 units of labor to make 1 unit
of G (aLG = 8) and 6 units of labor to make 1 unit of B (aLB = 6). In Chile, it takes 4 units of
labor to make 1 unit of G (a*LG = 4) and 2 units of labor to make 1 unit of B (a*LB = 2).
Peru has 64 units of labor (L=64), and Chile has 48 units of labor (L*=48).
8) Which country has the comparative advantage in GARLIC and why? (Show calculations)
PERU has the comparative advantage in garlic since the opportunity cost of 1 garlic is only 1.33
breath mints (8 hours versus 6 hours of labor), whereas the opportunity cost of 1 garlic in Chile
is 2 breath mints. (4 hours versus 2 hours)
9) Which country has the comparative advantage in BREATH MINTS and why? (Show
calculations)
CHILE has the comparative advantage in breath mints since the opportunity cost of 1 breath mint
is only ½ garlic (2 hours versus 4 hours of labor), whereas the opportunity cost of 1 breath mint
in Peru is ¾ garlic. (6 hours versus 8 hours)
10) Suppose that Chile is hit with a tsunami and labor falls from 48 to 36. Explain to what
extent this will affect comparative advantage, the direction of trade (who exports which products)
and the volume of trade.
Since the productivity parameters (units of labor to make a unit of a certain good) have not
changed, comparative advantage in the Ricardian model has not changed and, thus, the direction
of trade does not change either. Given that Chile is now a smaller country however, the volume
of trade may decline.