ASSIGNMENT LECTURE 2: GROUP 7

Exercise 1:
a) Identify comparative advantage of each nation
The relative cost of Singapore in producing rice = 4/8 = 1/2
The relative cost of Russia in producing rice = 4/16 = 1/4
=> Russia has a comparative advantage in producing rice. (¼<½)
The relative cost of Singapore in producing steel = 8/4 = 2
The relative cost of Russia in producing steel = 16/4 = 4
=> Singapore has a comparative advantage in producing steel. (2<4)
b) Identify and explain the pattern of trade between Singapore and Russia.
The pattern of trade:
Russia has a comparative advantage in producing rice.
=> Russia should specialize in the production of rice; export rice; import steel.
Singapore has a comparative advantage in producing steel.
=> Singapore should specialize in the production of steel; export steel; import
rice
c) Identify the range of international rate of exchange that brings about
mutual benefit?
The domestic rate of exchange of Singapore: 8R:4S
The domestic rate of exchange of Russia: 16R:4S
=> The range for mutual benefit:
8R < 4S < 16R (2R < 1S < 4R)
d) Would trade occur if Psteel/Price = 2.5?
Psteel/Price = 2.5 ⇔ 1S : 2.5R
The range for mutual benefit : 2R < 1S < 4R
-> 2.5R belongs to the range 2R to 4R (2R < 2.5R < 4R)
=> Trade would occur because the range of international rate of exchange
brings about mutual benefit.
e) Would trade occur if Price/Psteel = 5?
Price/Psteel = 5 ⇔ 1R:5S
The range for mutual benefit : 2R < 1S < 4R ⇔ 10R <5S < 20R
-> 1R does not belong to the range 10R to 20R
=> Trade wouldn’t occur because the range of international rate of exchange
doesn’t bring about mutual benefit.
f) If 1 ton of steel can be exchanged for 3 tons of rice, calculate gains of each
country in terms of labor time when exchanging 1 ton of steel? Which
country gains more?
- Assume 3 tons of rice: 1 ton of steel
-> The international rate of exchange: 3R:1S
- Both nations gain from trade
+ The domestic rate of exchange of Singapore: 2R:1S
+ The domestic rate of exchange of Russia: 3R:¾S
 => Singapore is better off by 3R-2R=1R or equivalent to 4 hours.
=> Russia is better off by 1S-¾S=¼S or equivalent to 4 hours.
-> Equal gain. Both countries benefit equally.
g) If two nations exchange 1steel for 3.5 tons of rice, identify the gains of
each nation in terms of rice?
- Assume 3.5 tons of rice: 1 ton of steel
-> The international rate of exchange: 3.5R:1S
- Both nations gain from trade
+ The domestic rate of exchange of Singapore: 2R:1S
+ The domestic rate of exchange of Russia: 3.5R:⅞S
=> Singapore is better off by 3.5R-2R=1.5R or equivalent to 6 hours.
=> Russia is better off by 1S-⅞S=⅛S or equivalent to 2 hours.
-> Singapore gains more.

Exercise 2:
a. Identify basis for and pattern of trade between France and Russia.
- Basis for trade: comparative advantage
+ France has a relative productivity of cloth (54/6=9) higher than that of
Russia (42/6=7)
⇒ France has a comparative advantage in producing cloth
+ Russia has a relative productivity of fridge (6/42=1/7) higher than that of
France (6/54=1/9)
⇒ Russia has a comparative advantage in producing fridge
- Pattern of trade:
+ France should export cloth, import fridges
+ Russia should export fridges , import cloth

b. Identify the range of international rate of exchange that brings about mutual
benefit?
- The domestic rate of exchange of France: 6F:54C or 1F:9C
- The domestic rate of exchange of Russia: 6F:42C or 1F:7C
⇒ The range of international rate of exchange that brings about mutual benefit:
42C < 6F < 54C or 7C < 1F < 9C

c. If two nations exchange 1 fridge for 10 meter of cloth, identify the gains of
each nation.

France Russia
Autarky 1F = 9C 1F = 7C
Basis for trade Comparative advantage in Comparative advantage in
 producing cloth producing fridge
Export cloth Export Fridge
Pattern of trade
Import Fridge Import Cloth
Rate of exchange 1F = 10C
Gains from trade 10F - 9F = 1F 10C - 7C = 3C

d. If two nations exchange 2 fridge for 15 meter of cloth, identify gains of each
nation in terms of meter of cloth.
e. At which rate of exchange, gains of two nations are equal.

THE GAINS FROM TRADE BY THE RATE OF EXCHANGE

The rate of Gains from trade
exchange Note
between F & C France Russian World

2F = 13C No trade
2F = 14C 4C 0C 4C No trade
2F = 15C 3C 1C 4C
2F = 16C 2C 2C 4C Equal trade
2F = 17C 1C 3C 4C
2F = 18C 0C 4C 4C

Conclusion:
1. When the rate of exchange is 2F = 15C, the gains from trade of France and
Russia are 3C and 1C, respectively.
2. When the rate of exchange is 2F = 16C, the gains from trade of France and
Russia are equal.

Exercise 3:
1.
a/ Which country, if any, has an absolute advantage in bread? In telephones?
Which country has a comparative advantage in bread? In telephones?
In Leinster In Saxony

Bread for hour (B) 1/3 1/4

Telephone for hour (T) 1/9 1/20

Leinster has absolute advantage in bread (1/3 > 1/4) and absolute advantage in
telephone (1/9 > 1/20)
Saxony has a comparative advantage in bread (3/4 > 9/20)
Leinster has a comparative advantage in telephone (20/9 > 4/3)

b/ Is there a basis for trade between Leinster and Saxony? Explain.

Basis for trade: comparative advantage because each country has a comparative
advantage in producing one kind of commodity

c/ What price rations (telephones per loaf) are possible with free trade?
Leinster: 1/3B : 1/9T equivalent 3B : T
Saxony: 1/4B : 1/20T equivalent 5B : T
price rations (telephones per loaf) are possible with free trade: 4B:T

2.
a/ If the two countries agree to trade goods at a price of one telephone for four
loaves of bread, who will export bread? Who will export telephones? Explain.
Saxony has a comparative advantage in bread and Leinster has a comparative
advantage in telephone so 4B : T so Saxony will export bread and the other will export
telephone and 2 countries will gain 1 bread.

b/ Which country, Leinster or Saxony, will get the higher benefit at the rate of
exchange mentioned in part a.
2 countries will gain 1 bread: 4B : 1T
Saxony agree to trade goods at 4B : 1T and Saxony export bread so they have to spend
16 hours to have a Telephone (20 hours) (gain 4 hours)
Leinster agree to trade goods at 4B : 1T and Leinster export telephone so they have to
spend 9 hours to have 4 loaves of bread (12 hours) (gain 3 hours)
Leinster will get the higher benefit at the rate of exchange 4B : 1T