NORTHEASTERN UNIVERSITY

DEPARTMENT OF ECONOMICS

ECON 1115 Alim Nurmamedov

Principles of Macroeconomics

Homework # 1

Instructions: Answer all questions below. Make sure to show your work. Your answers
must be typed. (TOTAL = 40 POINTS)

1. The countries of Figistan and Blah are small island countries in the South Pacific. Both
produce fruit and timber. Each island has a labor force of 1,200. The following table gives
production per month for each worker in each country. (25 points)

BASKETS OF FRUIT BOARD FEET OF TIMBER

Figistan workers 10 5
Blah workers 30 10

Productivity of one worker for one month

a. Which country has an absolute advantage in the production of fruit? Which country has
an absolute advantage in the production of timber?
Answer:
Blah has an absolute advantage in the production of both fruits and timbers, because their
productivity is higher.

b. Which country has a comparative advantage in the production of fruit? of timber?

Answer:
In the production of boards of timber, Figistan has a competitive advantage, because it
has lower opportunity cost. Blah should produce Timber (has a comparative advantage in
producing timber), because its opportunity cost is lower.

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c. Sketch the ppf ’s for both countries.

d. Assuming no trading between the two, if both countries wanted to have equal numbers of
feet of timber and baskets of fruit, how would they allocate workers to the two sectors?
Answer:
1. To produce the same amount of fruits and timber, Blah should separate its labor this
way:
as we need 3 fruits to produce 1 timber, let 3 workers work on timber for 1 worker
on fruit. Now, we get the equation: 3x+1x=1200, where 3x- the amount of workers
for timber and 1x is the number of workers on fruit. x= 300, 3x = 900. 900 people
should work on timber and 300 hundred people should concentrate on fruit.
2. Using the same logic, Figistan should have 2 timber workers for 1 fruit worker. The
equation is 1200 = x+2x, where 2x is the number of timber workers and 1x works on
fruit. x= 400, 2x = 800. 800 people should work on timber and 400 people should
work on fruit

e. Show that specialization and trade can move both countries beyond their ppf ’s.
Blah will specialize in the production of fruits, because they have opportunity advantage
and Figistan will specialize in the production of timber. After both countries specialize,
Blah produces 30 fruits and Figistan produces 5 timber. Assume that Blah consume 3
timbers and 21 fruit. Frigistan consume 1 timber and 8 fruit. Blah will trade 9 fruits to
Frigistan for 4 timbers.

Consumption of Consumption Consumption of Consumption

timber before of fruit before timber after of fruit after
trade trade trade trade

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 Blah 3 21 4 21

Frigistan 1 8 1 9

So, Blah is better off because it consumes 4 timber instead of 3; Frigistan is better off
because it consumes 9 fruits instead of 8.

2. Explain how each of the following situations would affect a nation’s production possibilities
curve. (15 points)
a. A technological innovation allows the nation to more efficiently convert solar energy into
electricity.
The opportunity cost of solar energy will fall, since the country can produce more
electricity for the same resources. The curve will shift towards the increase of electricity
production.
b. A prolonged recession increases the number of unemployed workers in the nation.
Increase in unemployment will lead to downsize in economy. Consequently, the
production possibility curve will shift downwards.
c. A category 5 hurricane destroys over 40 percent of the nation’s productive capacity.
The demand will surpass supply. The curve will shift downwards.
d. The quality of education in the nation’s colleges and universities improves greatly.
The curve shifts upward because of economic growth. Investing in human capital
satisfies all requirements for economic growth.
e. The nation passes a law requiring all employers to give their employees 16 weeks of paid
vacation each year. Prior to this law, employers were not legally required to give
employees any paid vacation time.
Probably, the PPF will shift downwards, because less labor force will be involved.