Analyzing Country A's Production Possibilities Frontier and Gains From Trade

Suppose that country A produces two goods under conditions of constant opportunity
costs. Given its resources, the maximum S that it can make is 1000 units, and the
opportunity cost of making T is 2 units of S. What is the maximum amount of T that it can
produce? Draw a PPF for country A.
COUNTRY A
600
500
400
Commodity T 300
200
100
0
200
400
600
800
1000
1200
Commodity S
1. 1. For each of the following cases below determine the following:

(a) the relative price of S to T(Ps/PT) in each country before trade
(b) comparative advantage of each country
(c) the range of relative wage between country A and B: WA/(WB*E)
CASE 1
Country
Labor hours per unit of good,

hours XC
hours/bu. S
15
hours/yd. T
12
A has an absolute advantage in both S and T, but their comparative

advantage (greatest absolute advantage) is in T. B has a comparative
advantage (least absolute disadvantage) in S. The pretrade relative prices
are shown in the table below:
CASE 1
Country
(a) Opportunity cost
yd. T/bu. S
6/2 = 3
15/12 = 5/4 = 1.25
bu. S/yd. T
1/3 = 0.33
4/5 = 0.80
(b) Britain has a lower opportunity cost (relative price) of S, and

therefore a comparative advantage in this good. America has a
comparative advantage in T.
(c)
The limits to the relative wage rate, WA/(E x WB)
Britain's comparative advantage in S implies that PSA > E x PSB

Perfect competition implies PSA = WA x hoursSA, PSB = WB x hoursSB
Thus, WA x hoursSA > E x WB x hoursSB
Therefore WA/(E x WB) > hoursSB/hoursSA
America's comparative advantage in T implies that PTA < E x PTB
Perfect competition implies PTA = WA x hoursTA, PTB = WB x hoursTB
Thus, WA x hoursTA < E x WB x hoursTB
Therefore WA/(E x WB) < hoursTB/hoursTA
Combining hoursSB/hoursSA < WA/(E x WB) < hoursTB/hoursTA
Substituting values 15/6 < WA/(E x WB) < 12/2
Dividing yields 2.5 < WA/(E x WB) < 6
CASE 2
Country

hours XC
hours/bu. S
10
hours/yd. T
A has an absolute and comparative advantage in T. B has an absolute and

comparative advantage in S. The pretrade relative prices are shown in the
table below:
CASE 2
Country
yd. T/bu. S
10/4 = 2.5
5/5 = 1
bu. S/yd. T
4/10 = 0.40
(b) Britain has a lower opportunity cost (relative price) of S, and

comparative advantage in T.
(c)
Britain's comparative advantage in S implies that PSA > E x PSB

Thus, WA x hoursSA > E x WB x hoursSB
Therefore WA/(E x WB) > hoursSB/hoursSA
America's comparative advantage in T implies that PTA < E x PTB
Thus, WA x hoursTA < E x WB x hoursTB
Therefore WA/(E x WB) < hoursTB/hoursTA
Combining hoursSB/hoursSA < WA/(E x WB) < hoursTB/hoursTA
Dividing yields 0.5 < WA/(E x WB) < 1.25
CASE 3
Country

hours XC
hours/bu. S
10
hours/yd. T
20
B has an absolute advantage in both S and T, but their comparative

advantage (greatest absolute advantage) is in T. B has a comparative
advantage (least absolute disadvantage) in S. The pretrade relative prices

CASE 3
Country
yd. T/bu. S
10/20 = 0.5
8/4 = 2
bu. S/yd. T
0.5
(b) Britain has a lower opportunity cost (relative price) of T, and

comparative advantage in S.
(c)
America's comparative advantage in S implies that PSA < E x PSB

Thus, WA x hoursSA < E x WB x hoursSB
Therefore WA/(E x WB) < hoursSB/hoursSA
Britain's comparative advantage in T implies that PTA > E x PTB
Thus, WA x hoursTA > E x WB x hoursTB
Therefore WA/(E x WB) > hoursTB/hoursTA
Combining hoursTB/hoursTA < WA/(E x WB) < hoursSB/hoursSA
CASE 4
Country

hours XC
hours/bu. S
hours/yd. T
A has an absolute advantage in both S and T, but their comparative

advantage (greatest absolute advantage) is in A. B has a comparative
advantage (least absolute disadvantage) in T. The pretrade relative prices
CASE 4
Country
yd. T/bu. S
4/2 = 2
9/3 = 3
bu. S/yd. T
0.5
1/3 = 0.33
(b) Britain has a lower opportunity cost (relative price) of T, and

comparative advantage in S.
(c)
America's comparative advantage in S implies that PSA < E x PSB

Thus, WA x hoursSA < E x WB x hoursSB
Therefore WA/(E x WB) < hoursSB/hoursSA
Britain's comparative advantage in T implies that PTA > E x PTB
Thus, WA x hoursTA > E x WB x hoursTB
Therefore WA/(E x WB) > hoursTB/hoursTA
Combining hoursTB/hoursTA < WA/(E x WB) < hoursSB/hoursSA
2. Suppose that there are 20,000 hours of labor available in country A,

and that 5 hours of labor are required to produce one unit of S, while 4
hours are required to produce one unit of T. Draw A's PPF and find its
slope. What is the relative price of S to T (Ps/PT)?
Country A
The intercept on the S axis will be

20000 (hours/year)/5 (hours/bu) = 4000 (bu/yr)
The intercept on the T axis will be
20000 (hours/year)/4 (hours/yd) = 5000 (yd/yr)
Slope = autarky price = 5/4 =1.25
The autarky price (Ps/Pt) = 5/4 = 1.25 (yd/bu).
6.
3. Use the information in problem 2 plus the following additional data to graph A's
trade triangle:
world relative price of S to T=2;
As imports of T=1000;
Find As exports of S = ?
Since the world relative price line is steeper than the autarky relative
price, we know that country A has comparative advantage in S production
and will specialize in that good. From question 5, we know it will produce
4,000 units of S. It will have to export some of those in order to finance
the import of 2,000 units of T. How much does it have to export? If
PS/PT2, then the price of T per unit of S equals PT/PS 1/2, and 2,000
units of T cost 1,000 units of S.
Trade
Triangle

Analyzing Country A's Production Possibilities Frontier and Gains From Trade

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Analyzing Country A's Production Possibilities Frontier and Gains From Trade

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Suppose that country A produces two goods under conditions of constant opportunity

1. 1. For each of the following cases below determine the following:

Labor hours per unit of good,

A has an absolute advantage in both S and T, but their comparative

(a) Opportunity cost

15/12 = 5/4 = 1.25

(b) Britain has a lower opportunity cost (relative price) of S, and

The limits to the relative wage rate, WA/(E x WB)

Britain's comparative advantage in S implies that PSA > E x PSB

Labor hours per unit of good,

A has an absolute and comparative advantage in T. B has an absolute and

(a) Opportunity cost

(b) Britain has a lower opportunity cost (relative price) of S, and

The limits to the relative wage rate, WA/(E x WB)

Britain's comparative advantage in S implies that PSA > E x PSB

Labor hours per unit of good,

B has an absolute advantage in both S and T, but their comparative

advantage (least absolute disadvantage) in S. The pretrade relative prices

(a) Opportunity cost

(b) Britain has a lower opportunity cost (relative price) of T, and

The limits to the relative wage rate, WA/(E x WB)

America's comparative advantage in S implies that PSA < E x PSB

Labor hours per unit of good,

A has an absolute advantage in both S and T, but their comparative

(a) Opportunity cost

(b) Britain has a lower opportunity cost (relative price) of T, and

The limits to the relative wage rate, WA/(E x WB)

America's comparative advantage in S implies that PSA < E x PSB

2. Suppose that there are 20,000 hours of labor available in country A,

The intercept on the S axis will be

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