Q2. The following table shows the output of textile and auto one unit of labor can produce in the U.K. and the U.S.: TextilesAutosUnited Kingdom164United States126 Which country has an absolute advantage in textiles and which country has an absolute advantage in autos?What is the autarky price ratio of autos relative to textiles in each country?Which country has a comparative advantage in textiles and which country has a comparative advantage in autos?Which product should each country export?Suppose the United States has 150 units of labor available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for the United States.Suppose the international price is set at 1 auto:3 textile and the U.S. 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 export good, how much does the U.S. gain (measured in terms of the other good)?Discussion: At what level of international price ratio will all the benefits from trade accrue to the United States? Your answer:

Absolute advantage describes circumstances in which one company or country can create a specific…

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MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter18: International Trade And Comparative Advantage

Section: Chapter Questions

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Q2. The following table shows the output of textile and auto one unit of labor can produce in the U.K. and the U.S.:

	Textiles	Autos
United Kingdom	16	4
United States	12	6

Which country has an absolute advantage in textiles and which country has an absolute advantage in autos?
What is the autarky price ratio of autos relative to textiles in each country?
Which country has a comparative advantage in textiles and which country has a comparative advantage in autos?
Which product should each country export?
Suppose the United States has 150 units of labor available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for the United States.
Suppose the international price is set at 1 auto:3 textile and the U.S. 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 export good, how much does the U.S. gain (measured in terms of the other good)?
Discussion: At what level of international price ratio will all the benefits from trade accrue to the United States?

Your answer:

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