Question

#1. The following table illustrates the demand and supply schedules for calculators in Sweden and Norway (measured in dollars). Price Sweden Norway Quantity Supplied Quantity Demanded | Quantity Supplied Quantity Demanded 0 1,200 1,800 200 1,000 - 1,600 400 800 1.400 600 600 1,200 800 400 200 1,000 1,000 200 400 800 1,200 600 600 1,400 800 400 1,600 1,000 200 1,800 1,200 a. In a similar graph to Figure 3.6(a) - page 106- of the Carbaugh text, draw the demand and supply schedules for each country. (3 marks) b. In the absence of trade, calculate the equilibrium prices and quantities exchanged in each country. Which country has the comparative advantage in calculators? Show this on your graph (3 marks) C. Assume there are no transportation costs. With trade, what will be the equilibrium price and how many calculators are traded at this price? How many calculators are produced and consumed in each country with trade? Show this on your graph. (4 marks) d. Suppose the cost of transporting each calculator is $5. With trade, what is the impact of the transportation cost on the price of calculators? How many calculators will each country produce, consume, and what is the volume of trade? Create a new graph-similar to Figure 3.6 (b) - page 106- of the Carbaugh text, and illustrate the new results (10 marks)

Answer 1

Suppose that there is a market-market for calculators in two countries- Country S and Country N. a. graph the demand and supply of both the countries. Chart 1: Market in Country S Price 500 1500 2000 1000 Quantity - Quantity supplied Quantity demanded The above figure is the market of calculators in Country S where orange line is the demand curve and blue line represents the supply curve. Chart 2: Market N Price 500 1500 2000 1000 Quantity Quantity supplied Quantity demanded The above figure is the market of calculators in Country N where green line is the demand curve and red line represents the supply curve.

in the absence of international, the equilibrium quantity in Country S is 600 units and equilibrium price are $15. These equilibrium points are achieved when the demand and supply curves intersect. in the absence of international, the equilibrium quantity in Country N is 600 units and equilibrium price are $30. These equilibrium points are achieved when the demand and supply curves intersect. Country S has a comparative advantage in producing calculators as it produces at the lower price as compared to Country N. suppose that there are no transportation costs. With trade, Equilibrium price = (price in Country S without trade + price in Country N without trade)/2 = (15 +30)/2 = $22.5 Thus, equilibrium price is $22.5 The following figures are showing the quantity demanded and quantity supplied. Chart 1: Market in Country S Price 300 500 909.000 1500 2000 Quantity Quantity supplied Quantity demanded In Country S, at $22.5 price, quantity demanded is 300 units and quantity supplied is 900. Since the quantity supplied is more than quantity demanded, 600 =900 – 300 units are exported.

Chart 2: Market N Price 300 500 900,000 1500 Quantity Quantity supplied -- Quantity demanded In Country N, at $22.5 price, quantity demanded is 900 units and quantity supplied is 300. Since the quantity supplied is LESS than quantity demanded, 600 (6900 - 300 units are imported.

Amount exported by Country S is equal to amount imported by Country N. now, suppose that cost of transporting each calculator is $5. With trade, price of Country S will increase by $5 as it exports, and it has comparative advantage in calculators. Price to Country becomes $20 (=15+5) In Country S, at $20 price, quantity demanded is 400 units and quantity supplied is 800. Since the quantity supplied is more than quantity demanded, 400 (=800 - 400) units are exported. With trade, price of Country N will decrease by $5 as it imports calculators. Price to Country becomes $25 (=30 - 5) In Country N, at $25 price, quantity demanded is 800 units and quantity supplied is 400. Since the quantity supplied is less than quantity demanded, 400 (=800 - 400) units are imported The required figures are as follow:

Chart 1: Market in Country S Price 400 500 1500 2000 800 1000 Quantity Quantity supplied - Quantity demanded Chart 2: Market N Price 400 500 800 1500 1000 Quantity Quantity supplied Quantity demanded