MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 18, Problem 1TY
a)
To determine
To ascertain: The price of wine in terms of cloth in country E.
a)
Expert Solution
Explanation of Solution
If there is no trade, the price of wine in terms of cloth in E is = 8/2 = 4 yards of cloth/ barrel of wine.
| Country | Cloth in yards | wine in barrels | Opportunity cost of P in terms of cloth | |
| E | 8 | 2/8 = 0.25 | 2 | 8/2 = 4 |
| P | 12 | 6/12 = 0.5 | 6 | 12/6 = 2 |
b)
To determine
To ascertain: The price of wine in terms of cloth in country P.
b)
Expert Solution
Explanation of Solution
If there is no trade, the price of wine in terms of cloth in P is = 12/6 = 2 yards of cloth/ barrel of wine.
| Country | Cloth in yards | Opportunity cost of E in terms of wine | wine in barrels | Opportunity cost of P in terms of cloth |
| E | 8 | 2/8 = 0.25 | 2 | 8/2 = 4 |
| P | 12 | 6/12 = 0.5 | 6 | 12/6 = 2 |
c)
To determine
To draw: The
c)
Expert Solution
Explanation of Solution
The construction of PPF for both the countries is as follows:-
d)
To determine
To ascertain: The country that has
d)
Expert Solution
Explanation of Solution
| Absolute adv. | Comparative adv. | |
| Wine | P | P |
| Cloth | P | E |
P can produce more of cloth and wine using a week of labour; hence, it has an absolute advantage in both these products. However, the opportunity cost of producing cloth for P is more (6/12) than the same cost in E (2/8). Therefore, P has a comparative advantage in production of wine whereas E has a comparative advantage in production of cloth.
e)
To determine
To ascertain: The country that specialize in particular good and exporting the same.
e)
Expert Solution
Explanation of Solution
A country which has comparative advantage in production of good should specialize in production of that particular good and trade it with another country for another good.
E should produce cloth and export cloth and import wine from P. P should specialize and export wine for cloth with E.
f)
To determine
To ascertain: The price at which the trade should take place.
f)
Expert Solution
Explanation of Solution
An offer of 3 yards of cloth/1 barrel of wine is better than P's own production of 2 yards of cloth/1 barrel of wine
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