Question

Question 1 Consider an example of trade between two regions (North and South), similar to the one we discussed in class. The hourly output of workers in the North and South is given by the following table: North | South Shirts 4 2 Bread 1 3 To execute a trade, each shirt/loaf of bread must be brought to the market square. Shirts can be brought to the market square without additional costs, however, each loaf of bread costs d loaves in transaction costs to bring to the market. Bringing goods home from the market is free. (a) If trade is to occur, which region must be exporting shirts? What restrictions on the price of bread need to be satisfied for this region to willingly export shirts? (b) Which region exports bread? What restrictions on the price of bread need to be satisfied for this region to willingly export bread? (c) Write down an equation in d that describes the maximum transaction cost before trade breaks down. Explain the economic meaning behind this equation. (One way to do this is to say what would happen if d got any larger than this value? (d) Suppose that transaction costs are a function of distance between the two region . How far apart can the North and South regions be before trade breaks down?

Answer 1

Question 1: - 1 chiste I Bread Nh4 south The above table reveals In North 1 Labour takes one hour to produce 4 shirts. 1 Labour takes one hour to produce 1 loaf of bread. 2 South 1 labour takes one hour to produce a shirts, where as 1 Labour takel one hour to produce 3 Leaves of bread. The above information clearly mentioned North has got efficiency in production of shirts rathey than breads. On the othy hand south has gol more efficienly in the production of breads.

a of trade is to occur North must be exporting Shirts because Nooth has specialized to manufacture shirts. Horth Labourers are more efficience in manufacturing shirt rather Than South labourers. North should engage all of its labousness to manufacture only shirts. at exports Shirts to south and imports breads in exchange 6 Labourers in south are more efficient in manufacturing breads. so south region should export breads. es will be willingness to export breed to North in exchange of shirts c) Before trade Scanario will be In North in one hour I Labour produces 4 shirts Labour in one hour produces & bread In Two hours & Shirts & breads are being manuga

In south Ata I Labour in one hour I Labour in one hour produces a shirts produces 3 breads - In Two hours 5 nits of shirts & breade are manue fue tured. et d' got any larger vahe then it would breake the trade between two regions. Because south has to bear more transaction lost for bringing breads into the mooket without having any transaction cost certainly trade would conter more benefits for both the countries.