Reference no: EM132200864
Question: Suppose South Korea is endowed with 40 units of this all-purpose resource while Germany is endowed with 20 units. Answer the following questions.
|
Cloth (tons) |
Cars |
| Germany |
8 |
4 |
| South Korea |
4 |
1 |
a) Calculate the opportunity costs of every product for each country and show your calcualtions. Which country has an absolute advantage in the production of cloth? In the production of cars? Which country has a comparative advantage in the production of cloth? In the production of cars?
b) Suppose that, when trade between the two countries is not permissible, Germany allocates 60% of its resource endowment to the production of cars and South Korea allocates half of resource endowment to the production of cloth.
Draw carefully each country's production possibility frontier on a separate diagram. Indicate the production and consumption points of each country on your diagram. What is world output of each good?
c) Now, suppose that trade between the two countries is permissible. Which country will specialize in the production of cloth? Indicate the production points of each country after trade.
d) What is world output of cars and cloth after specialization? Is the world better off or worse off with specialization?
e) If the terms of trade are one car for 5 tons of cloth, will both countries accept to trade? If not, which country would be eager to trade, and which one would not want to trade?
f) Suppose that the terms of trade are 1 car for 3 tons of cloth or the price of one car is 3 tons of cloth. Would both countries accept to trade with each other at this price?
g) At the price of 3 tons for 1 car, South Korea wants to consume 91 tons of cloth. Indicate the post-trade consumption points of each country. Have both countries benefited from trade? Explain.