Reference no: EM131009951

Given two countries (Uganda & Botswana) and two goods (Cars and Shirts) model, suppose Uganda is endowed with ten million workers and each of its workers can produce either five cars or ten shirts per worker. Suppose also that Botswana is endowed with twenty million workers and each worker can produce two cars or six shirts per worker.

A) For each country derive and graph the constant opportunity cost PPF equation (use shirts as your x-axis). Assume that each country uses half of its workers to produce cars and shirts under autarky (label this point A in your graph). What is the opportunity cost of shirts for each country? Does one country have the absolute advantage in production of either good?

B) Politicians decide to open to trade. Which country will export cars and which country will export shirts? Why?

C) Choose a specific world relative price were both countries can trade. Pick a consumption point T assuming that both countries want to consume more of both goods. Solve for the values of T, exports and imports of both countries (hint: choose the consumption of one country first and hence its exports and imports. At the end imports should match exports). Label all your findings including trade lines, production and consumption points, exports, imports etc in the graph.

D) If we take the trade theory to its logical conclusion as discussed in class, how many cars and shirts are produced between the two countries? Is this partial or full specialization? Why do we achieve this result?