International Trade Analysis: ECO2ITR Assignment Semester 2

This assignment solution addresses key concepts in international trade, beginning with an analysis of production possibility curves for two individuals producing hamburgers and T-shirts, determining absolute and comparative advantages. The solution then presents a scenario involving two economies, H and F, producing goods X and Y, analyzing labor requirements, production possibilities, and equilibrium prices under autarky. The assignment explores opportunity costs, comparative advantages, and feasible world price ratios under free trade conditions. Furthermore, the solution examines the impact of increased capital stock on production possibilities and specialization, using relative supply curves to determine the effects of trade on factor inputs and income distribution. Finally, the solution answers multiple-choice questions related to trade benefits, labor mobility, government restrictions on imports, production functions, and income distribution effects.

Running head: INTERNATIONAL TRADE
International Trade
Name of the Student
Name of the University
Course ID

1INTERNATIONAL TRADE
Table of Contents
Question 2..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................4
Question c...............................................................................................................................5
Question d..............................................................................................................................5
Question 3..................................................................................................................................6
Question a...............................................................................................................................6
Question b..............................................................................................................................6
Question c...............................................................................................................................8
Question d..............................................................................................................................8
Question 4..................................................................................................................................9
References................................................................................................................................10

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Question 2
Question a
Total amount of labor available to country H is 2400 units
For producing one unit of X, country H requires 6 units of labor.
Therefore, using all its labor country H can produce total (2400/ 6) = 400 units of X
For producing one unit of Y, country H requires 12 units of labor.
Therefore, using all its labor country H can produce total (2400/ 12) = 200 units of Y
Figure 1: Production Possibility Curve for country H
Total amount of labor available to country F is 1800 units
For producing one unit of X, country F requires 4 units of labor.
Therefore, using all its labor country F can produce total (1800/4) = 450 units of X
For producing one unit of Y, country F requires 2 units of labor.

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Therefore, using all its labor country F can produce total (1800/ 2) = 900 units of X
Figure 2: Production Possibility Curve for country F
Under autarky, equilibrium price in both countries equals the opportunity cost of two
goods (Viner 2016).
In country H,
Equilibrium price ratio for good X= 1
2
Equilibrium price ratio for good Y =2
In country F
Equilibrium price ratio for good X=2
Equilibrium price ratio for good Y = 1
2

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Question b
amount of labour
per unit of output
X Y
H 6 12
F 4 2
From the above table, opportunity cost of X in country H is (6/12) = ½ unit of Y
Opportunity cost of X in country F is (4/2) = 2 units of Y
Feasible world price ratio for X is
1
2 ≤ PX ≤2
Opportunity cost of Y in country H is (12/6) = 2 unit of Y
Opportunity cost of Y in country F is (2/4) = ½ units of Y
Feasible world price ratio for Y is
1
2 ≤ PX ≤2

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Question c
Opportunity Cost X Y
H 6/12 = 1/2 12/6 = 2
F 4/2 = 2 2/4 = 1/2
For producing 1 unit of X, country H has to sacrifice ½ unit of Y while country F has
to sacrifice 2 units of Y. Because of the lower opportunity cost country X enjoys a
comparative advantage in producing X. Therefore, under free trade condition at the feasible
world price ratio country H exports good X.
Question d
Real return to labor in Home and Foreign country depends both on wage and price
level. In the above trade model, trade occurs due to differences in technology as suggested by
Ricardo (Senga, Fujimoto and Tabuchi 2017). In such trade model, free trade without any
transportation cost and tariff result in equalization of output prices. However free trade does
not equalize wage rate between the two countries and hence, real return to labor cannot be
equalized in Home and Foreign country. The main reason for difference in wages in two
nations is the difference in productivity of workers (Feenstra 2015). As return to labor
depends on marginal productivity of labors, difference in labor productivity results in
difference in wages which in turn cause a difference in real return to labor between the two
countries.

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Question 3
Question a
Figure 3: Production Possibility Curve for Home
As obtained from the given production function, employing 100 units of labor home
country can produce maximum 100 units of good 1 or 100 units of good Y. The initial
production possibility curve for home country is given by AB. Now with increase in stock of
capital increases possibility of increasing production of goods within the country. However,
production of both goods has not increased simultaneously (Leamer and Stern 2017). As
capital grows, production of good 1 increases shifting the production possibility curve
pivotally toward good 1. The new production possibility curve for Home country is given by
AB’.
Question b
Using the given production function (Table 1 and Table 2), relative supply of two
goods in Home and Foreign economy is obtained as follows

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Table 1: Relative supply and relative price for good 1 and good 2
Workers
Employe
d
Outpu
t of
good
1
Outpu
t of
good
2
MPL
in
secto
r 1
MPL
in
secto
r 2
Opportunit
y cost for
good 1
Relativ
e
supply
of
good1
Opportunit
y Cost for
good 2
Relativ
e
supply
of
good 2
10 25.1 39.8 1.51 1.59 1.05 0.63 0.95 1.59
20 38.1 52.5 1.14 1.05 0.92 0.73 1.09 1.38
30 48.6 61.8 1 0.82 0.82 0.79 1.22 1.27
40 57.7 69.3 0.87 0.69 0.79 0.83 1.26 1.20
50 66 75.8 0.78 0.6 0.77 0.87 1.30 1.15
60 73.6 81.5 0.74 0.54 0.73 0.90 1.37 1.11
70 87 86.7 0.69 0.5 0.72 1.00 1.38 1.00
80 87.4 91.4 0.66 0.46 0.70 0.96 1.43 1.05
90 93.9 95.9 0.63 0.43 0.68 0.98 1.47 1.02
100 100 100 0.6 0.4 0.67 1.00 1.50 1.00
Figure 4: Relative supply curve of good 1

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Figure 5: Relative supply curve of good 2
Question c
Production of good 1 involves employment of labor and capital and production of
good 2 involves employment of labor and land. Now with increase in capital stock in Home
country, production of good 1 increases. This indicates good 1 is capital intensive good. As
capital stock grows, Home country now is endowed with more capital (Van den Berg and
Lewer 2015). As employment of capital increases marginal product of capital home country
should export good 1. Foreign country in contrast should specialize and export good 2 which
require use of labor and land in production.
Question d
If the two countries open to free trade Home country should specialize in producing
good 1 while foreign country should specialize in producing good 2. After opening to trade,
factor inputs need to be engaged in producing the specialized good. Free factors are then
shifted from production of one industry to the production in line of specialization (Jones

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2018). In the ‘Home’ country, labor will move from production of good 2 to production of
good 1. If ‘Foreign’ country specializes in good 2, then labor will be shifted from good 1 to
good 2.
Question 4
1.A country does NOT engage in trade can benefit from trade only if
E) Pre-trade and free-trade relative prices are not identical
2. The effect of trade on specialized employees of exporting industries will be ____ jobs and
____ pay because they are relatively____.
E) more, higher, immobile
3. The Ricardian model of international trade demonstrates that trade can be mutually
beneficial. Why, then, do governments restrict imports of some goods?
C) Trade can have substantial effects on a country’s distribution of income
4. In the specific factor model, a country’s production function is ____ because of ____.
C) a curved line, diminishing marginal returns
5. The effect of trade on income distribution
C) can be significant in the short run

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References
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton
university press.
Jones, R.W., 2018. International Trade Theory and Competitive Models: Features, Values,
and Criticisms. World Scientific Books.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.
Senga, S., Fujimoto, M. and Tabuchi, T. eds., 2017. Ricardo and International Trade. Taylor
& Francis.
Van den Berg, H. and Lewer, J.J., 2015. International trade and economic growth.
Routledge.
Viner, J., 2016. Studies in the theory of international trade. Routledge.