Supply chain

Inseec  International Economics -  Spring 2021 -  quiz international trade

NAME (s) ______________________________

4 points each

1. Given the following production possibilities for two economies with constant costs (PPFs are straight lines),                                                                  

Explain:[pic 1]

a) Who has the absolute advantage in the production of each good?

• Greece has absolute advantage in both bread and olive oil

b+c) What is the opportunity cost to each country of producing each good?

d) Who has the comparative advantage in the production of each good?

• Greece has a comparative advantage in bread and Italy has a comparative advantage in olive oil

e+f)  If, in autarky, Italy chooses to have 8 bread, and Greece chooses to have 18 bread, how much olive oil can each one produce, and how much can each one consume?

• Italy has given up 18 loafs of bread each bread = 1/3 olive oil
• Greece has given up on 12 loafs of bread and each bread= ¾ olive oil  12 bread= 9 olive oil

g-i) If they open to free trade, specialize, and trade 10 bread for 20 olive oil, which good and how much will each one produce, and how much of each good can each one consume?  How much are their gains from trade?

2.  

[pic 2]

In the graph above, assume that:

Point A = 75w and 90c;  point B=30w and 195c; point E= 105w and 120c

a) In autarky, how much of each good would the country choose to produce?  Why?  How much of each would it consume?  How do you know?

• Point A, 75w and 90c
• Where ppf is tangent to indifferece curve I
• In Autarky , production= consumption

b-e) If it opens to trade, and the world prices of cloth/wheat  settles at PB: 

        i) How much of each good does the UK produce? Why?

• PB- Uk produces at B= 30w and 195c, where PB is tangent to PPF

        ii) How much does it consume? Why?

• UK consumes at E= 105w and 120c where PB is tangent to indifferece curve II

        iii) What - and how much- does it export?   What - and how much - does it import ?

• UK exports 75w and imports 75c triangle BCE

        iv) What does this suggest is the current world Pc/Pw?

f-g) Suppose that at PG   the country would produce 50w and 165c, and consume 80w and 105c.  

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