Question

1. Compare the absolute and comparative advantages for two countries. Suppose there are two countries A and B producing two products X and Y.

The unit labor requirement for two countries and two products are: a A X = 1; a A Y = 5; a B X = 10; a B Y = 10

• Which country has absolute advantage in producing X? Why?

• Which country has comparative advantage in producing X? Why?

• Suppose there are LA = 100 identical workers inhabiting in the Country A, define the production possibility set and the production possibility frontier for Country A. (you can use either algebra or numbers)

2. Look at the country A only, suppose each worker has preferences U defined by:

UA = β1ln(C A X ) + β2ln(C A Y ) , where C A X is the consumption level for product X and C A Y is the consumption level for product Y.

• Find the autarky equilibrium for economy A. (hint: following the three major steps on the handout) • And then describe the equilibrium for economy A.

Answer 1