Assume that: • Country A can produce 200 units of grapes or 400 units of wool. • Country B can produce 400 units of grapes or 400 units of wool. Suppose that the two countries sign a free trade deal, resulting in a single world price for each good. Assume that the two countries specialise completely, that is, they only produce only good (the one in which they have a comparative advantage). 1. Draw a diagram to show an aggregate production possibility frontier without trade and one with trade (see below), with grapes on the horizontal axis. 2. For each country, calculate the opportunity cost of grapes production (units of wool forgone per unit of grapes). State which country has the comparative advantage in
Assume that: • Country A can produce 200 units of grapes or 400 units of wool. • Country B can produce 400 units of grapes or 400 units of wool. Suppose that the two countries sign a free trade deal, resulting in a single world price for each good. Assume that the two countries specialise completely, that is, they only produce only good (the one in which they have a comparative advantage). 1. Draw a diagram to show an aggregate production possibility frontier without trade and one with trade (see below), with grapes on the horizontal axis. 2. For each country, calculate the opportunity cost of grapes production (units of wool forgone per unit of grapes). State which country has the comparative advantage in
Chapter1: Making Economics Decisions
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Transcribed Image Text:Assume that:
• Country A can produce 200 units of grapes or 400 units of wool.
• Country B can produce 400 units of grapes or 400 units of wool.
Suppose that the two countries sign a free trade deal, resulting in a single world price
for each good. Assume that the two countries specialise completely, that is, they only
produce only good (the one in which they have a comparative advantage).
1. Draw a diagram to show an aggregate production possibility frontier without trade
and one with trade (see below), with grapes on the horizontal axis.
2. For each country, calculate the opportunity cost of grapes production (units of wool
forgone per unit of grapes). State which country has the comparative advantage in
each good.
3. With reference to your diagram and analysis above, explain which good each country
would export (and import) and why the two countries might benefit from such trade.
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