International Trade Assignment: Economic Models and Trade Analysis

This assignment delves into the core concepts of international trade, commencing with an exploration of opportunity cost and its role in determining comparative advantage between countries like India and Thailand, using the 2x2 model to illustrate specialization and trade gains. The assignment then progresses to production possibility curves (PPCs) and the theories of absolute and comparative advantage, using examples to demonstrate how countries and individuals can benefit from specializing in the production of goods where they have a lower opportunity cost. Furthermore, the assignment analyzes the impact of changes in capital stock on the production possibility frontier, illustrating the effects of trade on relative prices and the pattern of trade between home and foreign countries, and the impact on labor. Finally, the assignment examines the conditions under which a country can benefit from trade and the reasons for government restrictions on imports, referencing the Ricardian and specific factor models to explain the effects of trade on income distribution.

Running head: INTERNATIONAL TRADE
INTERNATIONAL TRADE
Name of student:
Name of University:
Author note:

1INTERNATIONAL TRADE
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................4
Question 3..................................................................................................................................7
Question 4................................................................................................................................10
References................................................................................................................................11

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Question 1
Lack of resources is a basic problem and faced by every economy. This kind of
problem is faced by countries because wants are limitless, and thus to overcome this problem
of scarcity, countries must take decisions regarding choices. Here comes the powerful
economic concept which is Opportunity cost. Opportunity cost thus defined as amount of
value of any commodity forgone in order to get value of another commodity (Jablonski,
Schmit and Kay, 2016).
Now considering two countries and two commodities model i.e., 2 *2 model the
concept of opportunity cost can be explained. Let the two countries be India and Thailand and
the two commodities are rice and cloth. Both countries are self sufficient and can produce
both commodities. But specializing in the commodity for which they have comparative
advantage and then trading that commodity allows both economies to consume more. Below
table 1 shows how much units of rice and cloth produced by each country.
Countries Rice (kg) Cloth (meter)
India 10 5
Thailand 5 2
Table1: Production figure
The above table shows India produces 10kg of rice and 5 meter of cloth while
Thailand produces 5kg of rice and 2 meter of cloth. Graphically it can be shown using
production possibility curve. PPC shows the efficiency in production and possible allocation
possibility for a given level of resources (Ruijs et al.2013). Here it mainly used to shows the
tradeoff between producing two commodities.

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Diagram 1 PPC of India
Diagram 2 PPC of Thailand
The above diagram 1 and diagram 2 shows PPC of Thailand and India, presently countries
are producing rice and cloth using a specific bundle.
India
India
Cloth
10
5
0
Rice
Thailand
Cloth
Rice
2
10
0

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Now for showing the opportunity cost of rice and cloth by India and Thailand below table is
considered.
Countries
Opportunity cost of 1kg
of rice
Opportunity cost of 1
meter of cloth
India 0.5 2
Thailand 0.4 2.5
Table 2: Opportunity cost
The above table shows opportunity cost incurred by India for producing 1 kg of rice is 0.5
and that of Thailand is 0.4. With respect to cloth, opportunity cost of producing 1 meter of
cloth is 2 and 2.5 by India and Thailand respectively. Here it is thus observed that Thailand
has low opportunity cost of producing rice compared to cloth. Thus Thailand will produce
more rice and will export rice in order to gain from international trade. On the other hand
India will specialize in producing cloth and will export cloth. Hence, it can be observed that
country that has low opportunity cost of producing a commodity then that country will
specialize in producing that commodity (Kurzban et al.2013). This is the reason why
Thailand will be producing less cloth for producing more of rice and this is due to the fact
rice will provide more economical benefit to country.
Question 2
a) Production possibility curve (PPC) mainly shows that efficient production bundles
attained by a country to achieve efficiency in production. It mainly addresses the issue
of scarcity which is a common problem faced by economies in producing goods(Ruijs
et al.2013). This concept of PPC is best understood by considering examples.

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Table 1: Production figure
Considering the above table it is observed that Mike if produce 10 hamburgers then Johnson
will produce 7 hamburgers while with respect to T-shirt, Mike produces 3 T-shirts and
Johnson produces 4 T-shirts.
Diagram 1 Production Possibility Curve (PPC)
The above diagram shows production possibility curve CD. A and B are two commodity
bundles. Mike and Johnson can attain either bundle. Mike if attain bundle A then more
hamburgers are produced and less shirt is produced and Johnson if attain bundle B he will
produce more of shirts less of T-shirts. However, it is clear that although low T-shirts are
produced less but selling T-shirts is more profitable than hamburgers.
A
B
T-sT-shirt
Hamburger
10
3 4
7
0 D
C
Hamburgers T-shirt
Mike 10 3
Johnson 7 4

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b) Absolute advantage theory was first described by Adam smith. This theory mainly
shows the ability of an individual to produce greater quantity of a commodity given
the resource constraint (Schumacher, 2012).
Hamburger
s T-shirt
Mike 10 3
Johnso
n 7 4
Table 1:Production figure
According to table 1, Mike produces 10 hamburgers using 24 hours or can produce 3
T-shirts using same hours of labor. On the other hand Johnson produces 7 hamburgers
and 4 T-shirts a day. From the point of view of absolute advantage theory, Mike has
absolute advantage in producing hamburgers while Johnson has absolute advantage in
producing T-shirts. But the absolute advantage enjoyed by Johnson is less than Mike
so Mike will enjoy absolute advantage in producing both the goods.
c) Opportunity cost plays an important role in determining the production of
commodities. It mainly gives idea about the benefit received by producing one
commodity at the cost of forgoing the production of another commodity. If a person
incur low opportunity cost then that person have a tendency to produce more of that
commodity in order to achieve desired results .However, high opportunity cost if
incurred then production of that commodity does not provide much benefit (Kurzban
et al., 2013).
Opportuni
ty cost of
1
hamburger
Opportuni
ty cost of
1 T-shirt
Mike 0.3 3.3
Johnso
n 0.5 1.75
Table 2: Opportunity cost

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The above table shows that Mike incurs high opportunity cost while making T-shirts.
The reason behind this – Johnson can produce T-shirts at a low opportunity cost and
Mike can produce hamburger at a low opportunity cost. Hence, Johnson will produce
more of T-shirts and Mike should produce more of hamburgers.
d) Comparative advantage theory shows the advantage that an individual can have by
producing a commodity more efficiently for getting economic benefit rather than
producing another commodity. Thus comparative advantage provides a framework
that country’s should follow, the frameworks shows that a country should produce
that commodity in which efficient production is achieved (at lower opportunity cost)
than other commodities (Laursen, 2015).
Opportuni
ty cost of
1
hamburger
Opportuni
ty cost of
1 T-shirt
Mike 0.3 3.3
Johnso
n 0.5 1.75
Table 2: Opportunity cost
The above table shows that Mike has comparative advantage in producing hamburgers. The
reason behind this is, producing hamburger incurs low opportunity cost to Mike than
producing T-shirts which incurs high opportunity cost. Hence in order to benefit from
trading, Mike will produce hamburgers in order to reap benefits from trade.
Question 3
a) Production possibility frontier shows the maximum output possibilities of two
goods, given the inputs and factors of production. Labor, capital and technology all are
factors of production. Thus PPF provides different production bundle represented in form of
points on the curve and point lying on PPF are efficient ones while points inside PPF are

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considered inefficient points and points outside PPF is impossible to attain (Benhabib and
Nishimura, 2012).Let us now consider two countries home and foreign, both produces two
goods good 1 which uses labor and capital and good 2 which use labor and land. The
production functions of two goods are:
Production Function of good 1 Q1=Q1 (K1, L1)
Here Q1 refers to economy’s output of good 1, K1 is economy’s capital stock
and L1 is the labor force employed in good 1.
Production Function of good 2 Q2=Q2 (K2, L2)
Here Q2 refers to economy’s output of good 2, K2 is economy’s capital stock
and L2 is the labor force employed in good 2.
The condition for full employment requires the supply of labor employed in
good 1 plus supply of labor employed in good 2
L1+ L2=L
Initially both countries have same supply of labor, capital and land. Now if
capital stock of home country increases then it impacts PPF. Due to lack of land,
home will produce a high ratio of good 1 to good 2 at any given prices.
P2XMPL2
P1XMP1L12
P1XMP1L11
Wage rate
W2
W1
Labor used in good 1 Labor used in good
2
Wage rate
Amount of labor
shifted from good 2
to good 1

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Diagram 1: Changing capital stock
Diagram 1 shows relative supply curve is P2XMPL2 and relative demand curves are P1XMP1L1
and P1XMP1L12 , W1 and W 2 are wage rates . Now increase in capital supply shifts supply
curve to outward and increase in supply of labor shifts supply curve to inward. Thus home
has more capital per worker than foreign on the other hand foreign has more land per worker.
Thus in autarky situation relative price of good 1 in home country is lower than the relative
price in foreign in autarky situation. Thus trade leads to convergence of relative price.
b) Both countries have same supply of labor in autarky situation. Now with trade capital
stock of home country increases then it impacts PPF. Due to lack of land, home will produce
more good 1 and foreign will produce more good 2.
Diagram 1: Changing capital stock
Diagram 1 shows relative supply curve is P2XMPL2 and relative demand curves are P1XMP1L1
and P1XMP1L12 , W1 and W 2 are wage rates . Now increase in capital supply shifts supply
curve to outward and increase in supply of labor shifts supply curve to inward. Thus home
has more capital per worker than foreign on the other hand foreign has more land per worker.
P2XMPL2
P1XMP1L12
P1XMP1L11
Wage rate
W2
W1
Labor used in good 1 Labor used in good
2
Wage rate
Amount of labor
shifted from good 2
to good 1

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Thus in autarky situation relative price of good 1 in home country is lower than the relative
price in foreign in autarky situation. Thus trade leads to convergence of relative price.
c) Opening up to trade between home and foreign country provides benefit to
both the countries. The pattern of trade is thus given below.
Diagram 2: Pattern of trade
The above diagram shows that country that cannot participate in trade then the output
of that country equals its consumption. Now if the country involves itself in trade then,
international trade makes it possible to consume the goods which the country doesn’t even
produce, thus the mix of two goods can be consumed. Opening up to trade shifts relative
prices of good 1 and good 2. Thus pattern of trade shows that home will export good 1 and
foreign will export good 2. This pattern is followed because capital stock increases in home
and good 1 uses capital and labor and good 2 uses labor and land.
d) Considering diagram 2, opening up to trade shows that trade benefits the factors that
are specific to export, here capital and land will be affected as these factors used in
the export commodities. Home country exports good 1 which involves use of capital
and labor and foreign country exports good 2 which involves use of land and labor.
Relative price of good 1
RSF
RSH
RS world
RD world
Relative quantity of good 1
F
H
W

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Thus trade affects factors that are specific to export, but affects the import sector.
Effect of trade on labor is ambiguous.
Question 4
1. A country does not engage in trade can benefit from trade only if-Pre-trade and
Free-trade relative prices are not identical.
2. The effect of trade on specialized employees of exporting industries will be more jobs
and higher pay because they are relatively immobile.
3. The Ricardian model of international trade demonstrates that trade can be mutually
beneficial. Why, then, do governments restrict imports of some goods?
Answer-Trade can have substantial effects on a country’s distribution of income
4. In the specific factor model, a country’s production function is a curved line because
of diminishing marginal returns.
5. The effect of trade on income distribution can be significant in the short run

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References
Benhabib, J. and Nishimura, K., 2012. Competitive equilibrium cycles. In Nonlinear
Dynamics in Equilibrium Models (pp. 75-96). Springer Berlin Heidelberg.
Jablonski, B.B.R., Schmit, T.M. and Kay, D., 2016. Assessing the economic impacts of food
hubs on regional economies: A framework that includes opportunity cost. Agricultural and
Resource Economics Review, 45(1), pp.143-172.
Kurzban, R., Duckworth, A., Kable, J.W. and Myers, J., 2013. An opportunity cost model of
subjective effort and task performance. Behavioral and Brain Sciences, 36(6), pp.661-679.
Laursen, K., 2015. Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), pp.99-115.
Ruijs, A., Wossink, A., Kortelainen, M., Alkemade, R. and Schulp, C.J.E., 2013. Trade-off
analysis of ecosystem services in Eastern Europe. Ecosystem services, 4, pp.82-94.
Schumacher, R., 2012. Adam Smith's theory of absolute advantage and the use of
doxography in the history of economics. Erasmus Journal for Philosophy and
Economics, 5(2), pp.54-80.