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ECON6023: INTERNATIONAL TRADE

Practice Questions 1

1. The following table shows the number of resource units required to produce each computer and piece of software in China and India.

i. Which country has the absolute advantage in the production of each good?

ii. Which country has the comparative advantage in the production of each good?

iii. What are the autarky prices of computers and software in China and India?

iv. If we allow China and India to trade freely, then:

a. What will be the pattern of trade?

b. What will be the free trade prices of computers and software?

v. Assume that China and India are endowed with 100 people each. Using the information in the table above:

a. Draw the production possibilities frontier (PPF) for India.

b. On the same figure, draw the PPF fbr China.

c. On the same figure, draw the world PPF.

d. Consider the production point (software, computers) = (10,10). At this point, assume that China is producing 10 units of software and that India is producing 10 computers. Are India and China allocating their resource units according to comparative advantage? Explain.

e. If your answer in part (d) was "n。”, show how India and China could allocate their resource units according to comparative advantage (i.e. “efficiently”)and still produce 10 computers.

2. Assume that the countries of Central America only produce coffee and bananas. The table below gives the total units of labour available in five countries, as well as the number of labour units needed to produce a kilo of coffee or a kilo of bananas.

a. Draw the total PPF of these five coxintries.

b. If these countries are the only producers of these goods, describe the pattern of production under free trade.

3. Many countries produce and export the same goods (e.g. cars). In such cases, how do we determine whether or not a particular country has a comparative advantage in the production of such goods? One approach is to measure a country's "revealed comparative advantage” in particular industries using the Balassa Index. This Balassa Index for industry j in country A is measured as follows:

_A    share of industry j in country N exports ^j share of industry j in reference country exports

a. What value of BIj would indicate that country A has a revealed comparative advantage in the production of good j?

b. The table below provides the Balassa Indices for a number of countries and goods. According to the table, which countries have the revealed comparative advantage in producing which goods? (NB: the 'reference country^, is in fact the group of 28 countries which are members of the OECD).

c. What might be some of the measurement problems associated with the Balassa index which could potentially bias its results?