INTERNATIONAL TRADE THEORY

Exercise 1

Nation 1 has 100 laborers and Nation 2 has 200 laborers. The labor productivity of each nation for bicycles and shoes is given in the table below.

Output per Labor Day

Answer the following questions and justify your answers.

a)    Draw the daily production possibility frontier for each nation, with Bicycles on the vertical axis

a)    Which nation has a higher standard of living before trade? (Assume the population is the same as the number of laborers.)

United states have higher standard of living

b)    What is the opportunity cost of Shoes and bicycles in each nation,

In the United States Pw/Pc=3/4, while in the United Kingdom, Pw/Pc=2.

In the United States Pc/Pw=4/3, while in the United Kingdom Pc/Pw=1/2.