Econ 310 - Consider the two fictional island nations
Question # 00483612
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Updated on: 02/13/2017 01:29 AM Due on: 02/13/2017
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International Economics
Econ 310
Total: 11 Points Note: Please show your work. Partial credit will be given, but I need to see your work. Consider the two fictional island nations of San Lorenzo and San Salvatore. Your job is to analyze the
potential for trade between the two nations. Throughout this analysis all 12 assumptions from the book
will hold, unless specifically stated otherwise. Further assume that both nations are part of a monetary
union and use the same currency, corporals ©. This means we do not need to consider an exchange
rate.
1. (4 points)
International Economics
Econ 310
Total: 11 Points Note: Please show your work. Partial credit will be given, but I need to see your work. Consider the two fictional island nations of San Lorenzo and San Salvatore. Your job is to analyze the
potential for trade between the two nations. Throughout this analysis all 12 assumptions from the book
will hold, unless specifically stated otherwise. Further assume that both nations are part of a monetary
union and use the same currency, corporals ©. This means we do not need to consider an exchange
rate.
1. (4 points)
1.a.
Given the table below identify the absolute and comparative advantages for each nation
(note: the table below lists hours of labor required to produce a unit of rum/cigars).
Hours of Labor Required to Produce Rum and Cigars
San Lorenzo
Rum
12
Cigar
3 San Salvatore
5
10
Given the table below identify the absolute and comparative advantages for each nation
(note: the table below lists hours of labor required to produce a unit of rum/cigars).
Hours of Labor Required to Produce Rum and Cigars
San Lorenzo
Rum
12
Cigar
3 San Salvatore
5
10
1.b.
Suppose that San Lorenzo has 10,000 hours of labor and that San Salvatore has 12,000
hours of labor to divide between the rum and cigar production. In the space below, graph the
production possibilities frontier (PPF) for each country. The graph does not need to be to scale,
but you must label the maximum levels of production for rum and cigars.
Suppose that San Lorenzo has 10,000 hours of labor and that San Salvatore has 12,000
hours of labor to divide between the rum and cigar production. In the space below, graph the
production possibilities frontier (PPF) for each country. The graph does not need to be to scale,
but you must label the maximum levels of production for rum and cigars.
1.c. In the space below list the range of possible terms of trade (aka trade prices) for rum and
cigars.
cigars.
1.d. In the space below compute the range of relative wage ratios for the two countries.
2. (5 points)
2.a
Now suppose instead that San Lorenzo has 10,000 hours of labor while San Salvatore
only has 1,200 hours of labor; while all else remains the same. Does this change the comparative
advantage for each nation? Explain why or why not?
2.a
Now suppose instead that San Lorenzo has 10,000 hours of labor while San Salvatore
only has 1,200 hours of labor; while all else remains the same. Does this change the comparative
advantage for each nation? Explain why or why not?
2b.
Suppose that in autarky, San Lorenzo is producing and consuming 583 1/3 units of rum
and 1000 units of cigars, while San Salvatore is producing and consuming 80 units of rum and 80
cigars. What is a possible trade level of production in each country that will allow both countries
to increase their consumption of both rum and cigars?
Suppose that in autarky, San Lorenzo is producing and consuming 583 1/3 units of rum
and 1000 units of cigars, while San Salvatore is producing and consuming 80 units of rum and 80
cigars. What is a possible trade level of production in each country that will allow both countries
to increase their consumption of both rum and cigars?
2c. Given the trade described in part b, what is the terms of trade? 2d. Given the price found in part c, what is the relative wage ratio for the two countries?
2e. What role does the relative size of each nation play in determining the terms of trade?
3. (1 point) What are some possible reasons why a San Lorenzo or San Salvatore would not want to
trade?
trade?
4. (1 point) Suppose that rum is requires relatively more capital to produce than cigars. What can
you conclude regarding the relative quantities of labor and capital in the two nations?
you conclude regarding the relative quantities of labor and capital in the two nations?
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Solution: Econ 310 - Consider the two fictional island nations