Homework Assignment
Graphical
Problem (30 pts.)
Two
nations, Canada and Russia, have the following numbers describing their
production and consumption situations prior to and then after trade with each
other. The nations, prior to trade, are producing
automobiles and wheat. Prior to trade,
each nation faces constant opportunity costs.
Russia has an MRT of 0.5, and Canada has an MRT of 2. (Please assume that wheat is on the vertical
axis and that the quantity of autos is on the horizontal axis). Suppose that in autarky Russia chooses to
produce and consume 40 autos and 40 bushels of wheat, and Canada chooses to
produce 40 autos and 80 bushels of wheat.
Please draw graphs showing the
situations for Russia and Canada and then answer, with reference to the graphs,
the following questions.
a. Are
these initial conditions favorable for trade?
If so, which nation has a comparative advantage
in which good?
b. If each
nation does, indeed, have a comparative advantage, then how much will each nation produce if it completely specializes in
the good in which it holds this comparative
advantage? What would be the net
production gain of both nations combined?
c. Now,
suppose the nations do, in fact, engage in trade with each other, and they trade
at a ratio of one bushel of wheat for one
auto. Please draw the trading
possibilities line that now exists for
these nations.
d. Suppose
that Russia decides to export 60 units of the good in which it has a comparative advantage. Where on your diagram is the new post-trade
consumption point for Russia? Has Russia gained in consumption from
trade? If so, by how much?
e. Please draw the trade triangle for Russia
showing how much it is now going to export and
how much it is going to import.
f. Does this trading situation likewise produce
favorable results for Canada? Please show where Canada now consumes after it
engages in trade with Russia. Does Canada gain from trade? If so, by how much? Please draw the trade triangle for Canada showing the amounts it is going to
export to and import from Russia.