International Trade Assignment: Theory and Application Solutions

This document presents a comprehensive solution to an International Trade assignment, covering key economic principles. It begins with an analysis of absolute and comparative advantage using production possibility frontiers, calculating opportunity costs, and illustrating trade scenarios between two individuals. The solution then delves into autarky equilibrium, world price ratios, and the impact of trade on production and exports. Furthermore, the assignment examines the effects of capital increases on production possibilities and the impact of trade on factor mobility, including labor and capital flows. Finally, it addresses multiple-choice questions related to trade, tariffs, and the Heckscher-Ohlin model. The assignment is a valuable resource for students studying international trade, providing detailed explanations and graphical representations to enhance understanding of core concepts. This assignment is contributed by a student to be published on the website Desklib. Desklib is a platform which provides all the necessary AI based study tools for students.

Running head: INTERNATIONAL TRADE
International Trade
Name of the student
Name of the University
Author note

1INTERNATIONAL TRADE
Table of Contents
Answer 1:.........................................................................................................................................2
a)..................................................................................................................................................2
b)..................................................................................................................................................3
c)..................................................................................................................................................4
d)..................................................................................................................................................4
Answer 2:.........................................................................................................................................5
a)..................................................................................................................................................5
b)..................................................................................................................................................6
c)..................................................................................................................................................6
d)..................................................................................................................................................6
Answer 3:.........................................................................................................................................7
a)..................................................................................................................................................7
b)..................................................................................................................................................8
c)..................................................................................................................................................8
d)..................................................................................................................................................8
Answer 4:.....................................................................................................................................9
1)..................................................................................................................................................9
2)..................................................................................................................................................9
3)..................................................................................................................................................9
4)..................................................................................................................................................9
5)..................................................................................................................................................9
Reference:......................................................................................................................................10

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3INTERNATIONAL TRADE
10
3
Hamburgers
T-shirts
Answer 1:
a)
Given that,
Hamburger T-shirts
Mike 10 3
Johnson 7 4
Figure 1: PPC of Mike
Source: (Created by Author)

4INTERNATIONAL TRADE
7
4
Hamburgers
T-shirts
Figure 2: PPC of Johnson
Source: (Created by Author)
b)
According the concept of absolute advantage, if a producer is engaged in production of
two commodities and specializes in production of only one product, then that producer is said to
have absolute advantage in production of that goods that he can produce at lower cost compared
to its rival (Feenstra 2015).
Considering the given data, it can be said that Mike has absolute advantage in
production of hamburgers, because he can produce 3 more hamburgers compared to Johnson.
On the other hand, Johnson has absolute advantage in production of T-shirts, because
he can produce 4 T-shirts utilizing all of his working hours compared to 3 T-shirts of Mike.

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c)
Opportunity cost is the benefit, which is foregone in order to perform another action.
According to the given question, there are two players, who are Mike and Johnson (Lewis 2015).
There opportunity cost is as follows:
In order to produce 3 T-shirts, 10 hamburgers has to be foregone by mike.
Thus, opportunity cost of Mike for T-shirts is: 10/3 = 3.33
On the other hand, for producing 4 T-shirts, Johnson has to foregone 7hamburgers.
Thus, opportunity cost of Johnson for T-shirts is: 7/4 = 1.75
From the above calculation, it can be seen that opportunity cost for producing T-shirts
is higher in the case of Mike.
d)
Comparative advantage is the ability of a producer to produce goods and services more
efficiently compared to other activities (Gopinath, Helpman and Rogoff 2014).
According to the question, opportunity cost of producing hamburgers for Mike and
Johnson is as follows:
Mike – 3/10 because he has to foregone 3 T-shirts for producing 10 units of hamburgers
Johnson – 4/7 as, Johnson have to foregone 4 units of T-shirts for 7 units of hamburgers.
From the analysis, it can be envisaged that, Mike has comparative advantage for
producing hamburgers.

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450
200
X
Y
Answer 2:
a)
Figure 3: PPF of H
Source: (Created by Author)

7INTERNATIONAL TRADE
400
200
X
Y
Figure 3: PPF of F
Source: (Created by Author)
Autarky equilibrium price ratio for H: Px/Py= 450/200 = 2.25
Autarky equilibrium price ratio for F: Px/Py= 400/200 = 2.00
b)
Range of feasible equilibrium world price ratios: (Px/Py) F< (Px/Py) W< (Px/Py) H
Therefore, world price ratio will lie between: 2.00< (Px/Py) W<2.25
c)
Country H will export X because it has comparative advantage in production of good X.
d)
Real return to labour equalize in home market because wage rate equates with MPL.

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Good 2
Good 1
New PPF
PPF
Answer 3:
a)
Figure 5: Effect of rise in capital in home on PPF
Source: (Created by Author)
With rise in capital in the home market, PPF will shift rightward from the side of good 1,
because home country produces only good 1. Rise in capital will not affect the production of
foreign country, thus the PPF will not shift horizontally rightward.

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Good 2
Good 1
New PPF
PPF
Supply foreign
Supply home
b)
c)
If the countries open up for trade, then they home country will export good 1 to the
foreign country owing to its competitive advantage in production of good 1. Besides this, the
foreign country will export good 2.
d)
If the countries open up trade, then, labours will shift from foreign country to home
country because, home country has comparative advantage in production of good 1, which is
labour intensive in nature. And following the same trend capital will flow to the foreign country
because it produces capital intensive product. Opening of trade will not affect the land.

10INTERNATIONAL TRADE
Answer 4:
1)
D) Pre-trade and free trade relative prices are identical
2)
C) More, lower, immobile
3)
E) Restriction on Imports are intended to benefit domestic consumers.
4)
C) A curved line, diminishing marginal returns
5)
C) Can be significant in the short run

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Reference:
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university
press.
Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014. Handbook of international
economics (Vol. 4). Elsevier.
Lewis, W.A., 2015. The evolution of the international economic order. Princeton University
Press.