International Economics – Cheap Research Essays

International Economics
Instructions
1. Answer only 2 questions.
2. Make sure that you fully explain your work.
3. Use neat and well-labeled diagrams to elucidate your answers.
4. Except for diagrams, which might be in ink, type your answers.

Questions:

1. Consider two countries, Alpha (A) and Beta (B), which are characterized as follows:

LA = 100; LB = 200; aLX = 5; aLY = 4; bLX = 9; and bLY = 6;
where Lj denotes country J’s labor supply, and JLi denotes Country J’s labor coefficient in the ith industry.

a. Draw the production possibilities frontiers of Alpha and Beta.
b. What is the autarky relative price of each good in each country?
c. Which country’s firms have an absolute advantage in the production of each good? Why?
d. Is free trade possible on the basis of absolute advantage? Explain fully, making sure you discuss the degree of specialization that would occur.
e. Is free trade possible on the basis of comparative advantage? Explain fully, making sure you discuss the degree of specialization that would occur.

2. “If I buy a coat from an American, we [Americans] get the coat and the money. If I buy it from a foreigner, we get the coat and they get the money. It is therefore

better to buy the coat from an American.” (Abraham Lincoln)
Critically evaluate this statement based on what you have learned in this class about the gains from trade, gains from specialization, and gains from exchange.

3. Discuss the concept of Pareto optimality and show why economists claim that free trade is Pareto optimal, at least on the basis of the compensation criterion.