Question

13. What assumption(s) in the production possibilities model may lead the model to overstate the gains from trade and cause the actual gains to be less than predicted by the model?

The assumption that there is only a two good economy. In reality the economy is much more complex, so the gains from trade will in fact be larger than what the model predicts.

The assumption that individuals will consume all that is produced. This leads the model to overstate the gains from trade because in reality items will not be consumed.

The assumption that all resources are converted into the other sector. This implies that there is no idle resources in the economy. Therefore, there is no unemployment in the model and all production facilities are running at 100 percent capacity. In reality there will be unemployment and idle production facilities because all of the land, labor, and capital can't be converted into the other sector.

14.Who gains from trade in this scenario? Who may be hurt by trade in this scenario?

Overall at the aggregate level both countries gain. There is no one hurt by trade.

Overall we can't say who benefits or who is hurt by trade. There are too many unknown factors to make a general prediction. ...

Overall at the aggregate level both countries lose. Overall consumption is decreased for both countries, because workers in the sector that disappeared may become unemployed. The communities that have large numbers of unemployed people will be hurt.

Overall at the aggregate level both countries gain. Overall consumption is increased for both countries, but workers in the sector that disappeared may become unemployed. The communities that have large numbers of unemployed people will be hurt.

Answer 1

13. The assumption in the production possibilities model may lead the model to overstate the gains from trade and cause the actual gains to be less than predicted by the model is:

The assumption that there is only a two good economy. In reality the economy is much more complex, so the gains from trade will in fact be larger than what the model predicts.

    - A simplifying assumption of production possibilities analysis is that the economy produces only two goods. In that the economy actually produces tens of thousands of different goods, this is one of these seemingly unrealistic assumptions.

14. Overall at the aggregate level both countries lose. Overall consumption is decreased for both countries, because workers in the sector that disappeared may become unemployed. The communities that have large numbers of unemployed people will be hurt.