The following table shows the output of rice and machinery one labor hour can produce in Mexico and Thailand: Rice Machinery Thailand 6 2 Mexico 2 1 What are the marginal products of labor in rice and machinery production in Thailand? What about Mexico? Which country has an absolute advantage in rice and which country has an absolute advantage in machinery? What is the autarkic price ratio of machinery relative to rice in each country? Which country has a comparative advantage in rice and which country has a comparative advantage in machinery? Suppose Mexico has 1,000 labor hours available. Construct the production-possibility frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for Mexico. Suppose the international price is set at 1 machinery:2.5 rice and Mexico decides to completely specialize in producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of import good, how much is Mexico’s gain/saving (measured in terms of the other good)? Discussion: What are the key assumptions of the model that could lead to a discrepancy between the model’s predictions in part f and the empirical evidence?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q1. The following table shows the output of rice and machinery one labor hour can produce in Mexico and Thailand:

	Rice	Machinery
Thailand	6	2
Mexico	2	1

What are the marginal products of labor in rice and machinery production in Thailand? What about Mexico?
Which country has an absolute advantage in rice and which country has an absolute advantage in machinery?
What is the autarkic price ratio of machinery relative to rice in each country?
Which country has a comparative advantage in rice and which country has a comparative advantage in machinery?
Suppose Mexico has 1,000 labor hours available. Construct the production-possibility frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for Mexico.
Suppose the international price is set at 1 machinery:2.5 rice and Mexico decides to completely specialize in producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of import good, how much is Mexico’s gain/saving (measured in terms of the other good)?
Discussion: What are the key assumptions of the model that could lead to a discrepancy between the model’s predictions in part f and the empirical evidence?

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