Question

This is one big question

Suppose the world has only two products (burgers and french fries) and only two countries (the US and Belgium). Trade in goods is completely free, and there are no assets in the world. Both countries are large enough to affect world prices.

(a) Under free trade, the US produces 20 million burgers and 20 million french fries, while Belgium produces 1 million burgers and 2 million french fries. Which of the following describes the pattern of trade?

1)US exports burgers and french fries

2)US exports burgers and imports french fries

3)US imports burgers and exports french fries
4)US imports burgers and french fries
5)Cannot tell without information on pre-trade relative prices

Now suppose that the supply of french fries in the US is devastated by a virulent potato beetle outbreak that destroys the US potato crop (from which french fries are made).

(b) What happens to the price of french fries, measured in terms of burgers?

1)Rises in the US, falls in Belgium

2) Falls in the US, falls in Belgium

3)Rises in the US, rises in Belgium

4)Falls in the US, rises in Belgium

5)Cannot tell without more information

(c) As a result, what happens to french fry and burger production in Belgium?

1)French fry and burger production both go up

2)French fry production goes up, and burger production goes down

3)French fry production goes down, and burger production goes up

4)French fry and burger production both go down
5)Cannot tell without more information

(d) Now suppose that a low-carb paleo craze in the US increases demand for burgers, so that US consumers now prefer to consume more burgers relative to french fries.

Explain what would happen to burger production and burger exports from/imports into Belgium. (Be sure to explain any assumptions you are making.)

Answer 1

Ans

1 2 is right because usa has comparative advantage in burgers and disadvantage in French fries

2 3 is right. Due to less supply price rises in usa. This lead to greater demand for imports which pushes up prices in Belgium also

3 2 is right because fries production is now relatively more profitable

4 Burger production rises because there is more demand and thus more profits. Burger exports and imports fall. This is becsuse of greater domestic consumption which also raises prices of imports in Belgium.we assume tastes don't change in Belgium