ASSIGNMENT NO 2:

INTERNATIONAL TRADE
SUBMITTED TO:
DR. ZAINAB JEHAN
SUNMITTED BY:
TAYYIBA ISHAQUE
REGISTRATION :
2019-M-ECON-2-18
Bases for trade:

Case 1:
Two countries, Two commodities, 1 FOP(Labour)
Before trade:
Country/commodity US Brazil
cars 4 1
Bikes 2 3

US: More efficient in production of Cars.

Brazil: More efficient in production of Bikes.
US: 1 Labour hour is used to produce 4 commodities of Cars. 1 Labour hour is
used to produce 2 commodities of bikes.
Brazil: 1 Labour hour is used to produce 1 commodities of Cars. 1 Labour hour is
used to produce 3 commodities of bikes.
US:
US is efficient in production of cars so specialize in cars by moving all the
resources from bikes industry to cars production. Export cars to brazil and import
bikes from brazil.
Brazil:
Brazil is efficient in production of bikes so specialize in bikes by moving all the
resources from cars industry to bikes production. Export bikes to US and import
cars from US.
Before trade production and consumption ratio
US Brazil
 4C:2B 1C:3B
Now we suppose both the countries want to enter international trade on the
following ratio.
4C:4B
US:
US gains 2 extra units of bikes so US has saved 60 mins for production of bikes. Us
employ 2 hours from bikes industry to cars industry and produce 12 commodities
of cars.
Brazil:
Brazil gains 3 extra units of cars requires 3 hours so they have saved this time my
importing cars from US. They employ all 4 hours into bikes industry and will be
produce 15 commodities of bikes.
After trade:
Country/commodity US Brazil
cars 12 0
Bikes 0 15

Consumption of cars in US = Production -export

= 12-4
=8
Consumption of bikes in US= production – import
= 0+4
=4
Consumption of cars in US = Production -export
= 15-4
= 11
Consumption of bikes in US= production – import
 = 0+4
=4

Country/commodity US Brazil
cars 8 4
Bikes 4 11

Before trade total production of cars 4+1=5

After trade total production of cars 12+0=12
Before trade total production of bikes 2+3=5
After trade total production of bikes 15+0=15
Case 1:
Two countries, Two commodities, 1 FOP(Labour)
Before trade:
Country/commodity Italy France
Wine 5 1
Cloth 4 3

Comparative advantage of Italy:

because the absolute advantage is higher in wine and cloth is absolute
disadvantage
Comparative advantage of France:
Cloth is absolute disadvantage is less in wine and wine is the comparative
disadvantage product because France has higher absolute disadvantage in wine as
compared to Italy.
Before trade production and consumption ratio
Italy France
5C:4B 1C:3B
Now we suppose both the countries want to enter international trade on the
following ratio.
5C:5B
Italy :
Italy gains 1 extra units of cloth so italy has saved 15 mins for production of cloth.
italu employ 1 hour and 15 mins from cloth industry to wine industry and produce
11 commodities of wine.
France:
France gains 4 extra units of wines requires 4 hours so they have saved this time
my importing wine from Italy. They employ all 5 hours into cloth industry and will
be produce 18 commodities of cloth.
After trade:
Country/commodity US Brazil
cars 11 0
Bikes 0 18

Consumption of cars in US = Production -export

= 11-5
=6
Consumption of bikes in US= production – import
= 0+5
=5
Consumption of cars in US = Production -export
= 18-5
= 13
Consumption of bikes in US= production – import
= 0+5
=5
Country/commodity US Brazil
cars 6 5
Bikes 5 13

Before trade total production of cars 5+1=6

After trade total production of cars 11+0=11
Before trade total production of bikes 4+3=7
After trade total production of bikes 18+0=18