International trade
Project description
Should answer all questions given in the coursework task.
EC2009 International Trade
Resit c
oursewo
rk assignment academic year 2013
–
2014
Instructions:
The word limit for this assignment is
1000 words maximum
. There is no minimum word
limit. Equations and diagrams will not count towards the word limit.
Answer the following
four
questions completely and accurately. Each question carries 25
points.
Question 1:
In your own words, explain the concept of offer curves. Using an original
example (
not
the one in the textbook) describe the way in which they are
derived. Use
diagrams and equations to complement your answer.
(25 points)
Question 2
:
Assu
me there are two nations: Colombia and Ecuador
that produce two
commodities: coconuts and passion fruits. The table below depicts the number of labour
hours requ
ired for the production of 1 Kg of commodity in each nation:
Colombia
Ecuador
passion fruits
8
12
coconuts
6
5
a) Calculate the relative prices for both commodities in both nations.
(5 points)
b) Calculate the opportunity cost of coconuts in t
erms
of passion fruits in Colombia
.
(5 points)
c) Suppose fruits are exchanged internationally at a rate of 1 coconut/passion fruit. Which
country will export passion fruits and why?
(5 points)
d) Assume each nation has a total workforce of 20000 labour
hours and that they employ
half of that workforce to produce each one of the two commodities. Determine the levels of
production of each commodity in each nation in autarky.
(5 points)
e) Using the information provided above and carrying out the necessary calculations, draw
the diagrams depicting the equilibrium
–
relative commodity prices with supply and demand.
(5 points)
Question 3
:
Assume there are two nations, nation 1 and nation 2. Each nation produces one
commodity: Nation 1 produces commodity X and nation 2 produces commodity Y. Both
commodities are equally capital/ labour intensive. Each nation is able to produce a
maximum of
5
000 units of commodity X and 8
000 units of commodity Y if they specialize
completely in the production of either commodities. In both nations, the production
possibilities frontier shows the same marginal rate of transformation and increasing
opportunity c
ost. Using graphical analysis and making assumptions about consumption
patterns of commodities X and Y in nations 1 and 2, determine under which conditions the
two nations would be able to trade with each other. Justify your answer.
(25 points)
Questio
n 4:
In a factor market characterized by perfect competition, there are two factors:
capital (K) and labour (L) with their respective prices: Price of labour (w) and price of
capital (r). There are two firms in the market of commodities: Firm 1 produces co
mmodity
X , and firm 2 commodity Y. The break
–
even point for the firm producing commodity X is
at
at 200 units of output hiring 40 units of labour and 4
0 units of capital. The price of
commodity X is £2. The break
–
even point for the firm producing commod
ity Y
is at 200
units of output hiring 20 units of labour and 4
0 units of capital. The price of commodity Y
is £3.
a) Find the values for the factor prices w and r and state the reasons why they are the same
for firms X and Y.
(6 points)
b) Assume
the price of commodity X increases to £4. Determine whether or not firm 1 is
still breaking even, given constant factor prices. Justify your answer with calculations.
(6 points)
c) Calculate the capital/ labour ratio for each commodity. By refe
rring to the theories
studied in the course so far, analyze the implications of a rise in the price of commodity X
on the outputs of commodities X and Y and on the factor prices w and r. (13 points)
