Reference no: EM131092745
The following table contains the information necessary to construct two Production Possibility Frontiers: one for a small country, and one for a large country. For simplicity both countries can only use their resources to produce cloth and computers. The small country has 70 units of labor and needs 2 units of labor to produce a computer but only l unit of labor to produce a unit of cloth. The large country has 90 units of labor and only needs 1 units of labor to produce either a computer or a unit of cloth.
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Country
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Opportunity Cost of 1 Computer
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Opportunity Cost of 1 Cloth
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Small
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2 Cloth
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1/2 of a Computer
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Large
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1 Cloth
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1 of a Computer
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Part 1: Use the infinite line tool to plot the production possibility frontier for the small country and label it as Small PPF.
Part 2: Use the infinite line tool to plot the production possibility frontier for the large country and label it as Large PPF.
Part 3: Assume that the small country employs 30 units of labor in the production of computers and 40 units of labor in the production of cloth. Assume further that the large country employs 45 units of labor in the production of both computers and cloth. Use the point tool to indicate these outcomes and label them as small country consumption without trade (SCC no trade) and large country consumption without trade (LCC no trade).
Now let the small country specialize completely in its comparative advantage and assume that it establishes terms of trade with the large country at 1.2 (or 6/5) units of cloth per computer. The large country will also specialize in its comparative advantage but by just enough to trade the smaller country for their increase in production at the terms of trade mentioned previously. Note that the large country *will not* specialize completely.
Part 4: Use the point tool to identify each country's specialization/production with trade and label them as Cloth Specialization (Cloth Specialty) and Computer Specialization (Comp Specialty).
Part 5: Use the point tool to identify each country's consumption if the small country trades 30 units of cloth for computers produced in the large country and label them as large country consumption with trade (LCC with trade) and small country consumption with trade (SCC with trade).
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