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Assignment I_OPTIONAL (out of 10 marks).


Assignment I_OPTIONAL (out of 10 marks).

INB300. Assignment I_OPTIONAL (out of 10 marks). Due April 23, 2020.

 

Name: ………………………………………………

ID: …………………………………………………..

Answer All Questions

1): Which assignment would you like to replace? (Tick either Assignment I or Assignment Two, BUT NOT BOTH)

Replace Assignment I ……………OR Replace Assignment II…………….). Tick one, NOT BOTH.

Note: If you DO NOT TICK one of the assignments, I will NOT CONSIDER your submission. If You Tick BOTH I will not consider your submission.

2): Submit online on Moodle. DO NOT email.

 

 

QN 1. Suppose USA and India can produce the following products given the resources they have (see Table 1). Also we are told that currently USA produces and consumes 40 units of textiles and 100 units of cars, while India produces and consumes 90 units of textiles and 40 units of cars. Based on this data and theory of comparative advantage, answer the following (assume constant opportunity cost):

Table 1

Product

USA

India

Textiles in tons (T)

90

150

Cars (C)

180

100

 

(a): Sketch the production possibility curves (PPF) for each country (one for USA, and one for India), with Textiles on the Y axis (1 marks)

(b): State which country has comparative advantage in Textiles, and which has comparative advantage in Cars (1 marks)

(c): Suppose now they started to trade and both countries completely specialize, show (compute) the production gains from specialization (2 marks)

(d): What is the price range Cars will trade at (i.e. terms of trade limits)? (1 marks)

 

QN2. The USA and China can produce two products (Textiles and Aircraft) (see Figure 1). Textiles is assumed to be labor -intensive and aircraft capital-intensive. You are also provided with USA production possibility curve (US PPF), and China’s production possibility (China PPF). In autarky, China (assumed to be relatively Labor – abundant) and USA (assumed to be relatively Capital – abundant) each produces and consumes 19 units of textiles and 9 units of aircraft. Under trade, the countries consume at point A based on the terms of trade as shown in Figure 1.

(a). Based on the Heckscher-Ohlin (H-O) theory, briefly explain which country has comparative advantage in Textiles and which comparative advantage in Aircraft (1 mark)

(b). Show (compute) the production gains from specialization (2 marks)

(c). Show (compute) the consumption gains from trade (2 marks)

 

 

Figure 1

 

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