Macroeconomics (7th Edition)
7th Edition
ISBN: 9780134738314
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 2, Problem 2.2.12PA
To determine
Impact of decreasing transportation cost.
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A country (Country X) that only produces two goods (good A) and (good B) in a closed market with another country (Country Y) that only produces the same two goods. Country X has 1000 workers and Country Y has 4000 and no workers can migrate. It takes Country X 2 workers to produce good A and 3 workers to produce good B whereas it takes Country Y 3 workers to produce good A and 1 worker to produce good B.
Labour is the only factor of production and both follow a standard Ricardian model that has an identical utility function.
Country X decides to adopt an import substitution strategy to improve the efficiency of productivity of good B.
Explain what this means and provide an opinion on this strategy?
During the summer you have made the decision to attend summer school, which prevents you from working at your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000 and books and supplies cost $1,300. In terms of dollars, what is the opportunity cost of attending summer school? Show your calculation.
What is comparative advantage? Give an example. Why does it make sense for economies to specialize according to comparative advantage and trade?
What is the production possibilities frontier? What economic concepts are represented in the production possibilities model?
Factor-price equalization
The fictional country of Tomczakistan is a nation that is relatively rich in capital resources. It can produce two types of goods, capital-intensive goods and labor-intensive goods. Tomczakistan’s production possibilities frontier (PPF) is shown on the following graph.
Currently, Tomczakistan is closed to international trade and producing at the grey point (star symbol) labeled A on the graph. Suppose that Tomczakistan is going to trade with Leightvania, a country that is relatively rich in labor and was also previously closed to international trade.
On the following graph, use the green point (triangle symbol) to indicate which way Tomczakistan will adjust its production by placing it on one of the two black points (plus symbol). Dashed droplines will automatically extend to both
axes.
Chapter 2 Solutions
Macroeconomics (7th Edition)
Ch. 2 - Prob. 1TCCh. 2 - Prob. 2TCCh. 2 - Prob. 2.1.1RQCh. 2 - Prob. 2.1.2RQCh. 2 - Prob. 2.1.3RQCh. 2 - Prob. 2.1.4PACh. 2 - Prob. 2.1.5PACh. 2 - Prob. 2.1.6PACh. 2 - Prob. 2.1.7PACh. 2 - Prob. 2.1.8PA
Ch. 2 - Prob. 2.1.9PACh. 2 - Prob. 2.1.10PACh. 2 - Prob. 2.1.11PACh. 2 - Prob. 2.1.12PACh. 2 - Prob. 2.1.13PACh. 2 - Prob. 2.1.14PACh. 2 - Prob. 2.2.1RQCh. 2 - Prob. 2.2.2RQCh. 2 - Prob. 2.2.3PACh. 2 - Prob. 2.2.4PACh. 2 - Prob. 2.2.5PACh. 2 - Prob. 2.2.6PACh. 2 - Prob. 2.2.7PACh. 2 - Prob. 2.2.8PACh. 2 - Prob. 2.2.9PACh. 2 - Prob. 2.2.10PACh. 2 - Prob. 2.2.11PACh. 2 - Prob. 2.2.12PACh. 2 - Prob. 2.2.13PACh. 2 - Prob. 2.2.14PACh. 2 - Prob. 2.2.15PACh. 2 - Prob. 2.3.1RQCh. 2 - Prob. 2.3.2RQCh. 2 - Prob. 2.3.3RQCh. 2 - Prob. 2.3.4RQCh. 2 - Prob. 2.3.5RQCh. 2 - Prob. 2.3.6RQCh. 2 - Prob. 2.3.7PACh. 2 - Prob. 2.3.8PACh. 2 - Prob. 2.3.9PACh. 2 - Prob. 2.3.10PACh. 2 - Prob. 2.3.11PACh. 2 - Prob. 2.3.12PACh. 2 - Prob. 2.3.13PACh. 2 - Prob. 2.3.14PACh. 2 - Prob. 2.3.15PACh. 2 - Prob. 2.3.16PA
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- There are two states: Apple State and Banana State. There are four homogeneous goods, one factor input (labor), and unit labor requirements are given in the following table. In addition, wage rate in Apple State is $2 and that in Banana State is $3. If two states agree to trade goods freely, which product(s) will Apple State produce? 0 0 0 0 Textile Fish Soybean Corn Units of labor required per unit of output Apple State Soybean Textile and Fish and Corn Fish, Soybean and Corn Corn 5 4 3 2 Banana State 2 2 4 4arrow_forwardAt the start of 2010 a new free trade area was established incorporating China and the six founding members of the Association of South East Asian Nations (ASEAN). These countries are Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. The aim is to eliminate 90% of imported goods. This deal created the largest trade area in the world, with nearly 1.9bn people. Although there are undoubted gains there have also been warnings from South East Asia that some industries are not ready to compete with China and that jobs will be lost. Questions What is a free trade area? Outline the potential advantages and disadvantages of joining this area for the member countries. What factors determine the extent to which industries within a country gain or lose?arrow_forwardGhana imports and exports food from and to neighbouring Côte d'Ivoire. The latter nation is very similar to Ghana in most ways. It has a similar environment, a similar level of education, and similar institutional background. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not? Ghana also exports food to Switzerland. The latter nation is very different to Ghana in most ways. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not?arrow_forward
- At the start of 2010 a new free trade area was established incorporating China and the six founding members of the Association of South East Asian Nations (ASEAN). These countries are Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. The aim is to eliminate 90% of imported goods. This deal created the largest trade area in the world, with nearly 1.9bn people. Although there are undoubted gains there have also been warnings from South East Asia that some industries are not ready to compete with China and that jobs will be lost. Question: What factors determine the extent to which industries within a country gain or lose?arrow_forwardGhana imports and exports food from and to neighbouring Côte d'Ivoire. The latter nation is very similar to Ghana in most ways. It has a similar environment, a similar level of education, and similar institutional background. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not? Ghana also exports food to Switzerland. The latter nation is very different to Ghana in most ways. Would you argue that trade between the two countries can be explained by comparative advantage? Why or why not? Explain import substitution industrialisation and how it can affect Ghana. What role does learning by doing play and when does it make sense for the government to interfere? Ghana’s president’s ISI strategy is to ask Switzerland to adopt a voluntary export restraint (VER). He believes that this is likely to increase Ghanaian welfare. Using two diagrams (one for each country) explain the Ghanaian welfare consequences of this policy.arrow_forwardMicroeconomics is the study of: The gains from trade since we can only consume what we produce (autarky) FIrm profits driving demand for inputs HH and firms exploiting productivity gains from specialization through trade (exchange) Household welfarearrow_forward
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