1. Canada and Australia are (mainly) English-speaking countries with populations that are not too different

1. Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60 percent larger). But Canadian trade is twice as large, relative to GDP, as Australia’s. Why should this be the case? 2. Mexico and Brazil have very different trading patterns. While Mexico trades mainly with the United States, Brazil trades about equally with the United States and with the European Union. In addition, Mexico does much more trade relative to its GDP. Explain these differences using the gravity model. 4. Over the past few decades, East Asian economies have increased their share of world GDP. Similarly, intra–East Asian trade—that is, trade among East Asian nations—has grown as a share of world trade. More than that, East Asian countries do an increasing share of their trade with each other. Explain why, using the gravity model. 5.A century ago, most British imports came from relatively distant locations: North America, Latin America, and Asia. Today, most British imports come from other European countries. How does this fit in with the changing types of goods that make up world trade? 1. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any combination in between. The Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between. a) Assume that all production possibility frontiers are straight lines. Draw one diagram showing the monthly production possibility frontier for the Tivoli and another showing the monthly production possibility frontier for the Frivoli. Show how you calculated them. b) Which tribe has the comparative advantage in spaghetti production? In meatball production? In A.D. 100 the Frivoli discover a new technique for making meatballs that doubles the quantity of meatballs they can produce each month. c. Draw the new monthly production possibility frontier for the Frivoli. d. After the innovation, which tribe now has an absolute advantage in producing meatballs? In producing spaghetti? Which has the comparative advantage in meatball produc- tion? In spaghetti production? 2. According to the U.S. Census Bureau, in July 2006 the United States exported aircraft worth $1 billion to China and imported aircraft worth only $19,000 from China. During the same month, however, the United States imported $83 million worth of men’s trousers, slacks, and jeans from China but exported only $8,000 worth of trousers, slacks, and jeans to China. Using what you have learned about how trade is determined by comparative advantage, answer the following questions. a) Which country has the comparative advantage in aircraft production? In production of trousers, slacks, and jeans? b) Can you determine which country has the absolute advan- tage in aircraft production? In production of trousers, slacks, and jeans? 3. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU. a) Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake? b) If the EU and the United States continue to trade, what do you think will characterize the goods that the EU exports to the United States and the goods that the United States exports to the EU? 4. You are in charge of allocating residents to your dormitory’s baseball and basketball teams. You are down to the last four people, two of whom must be allocated to baseball and two to basketball. The accompanying table gives each person’s bat- ting average and free-throw average. Batting average 70% 50% 10% 80% Free-throw average 60% 50% 30% 70% a) Explain how you would use the concept of comparative advantage to allocate the players. Begin by establishing each player’s opportunity cost of free throws in terms of batting average. b) Why is it likely that the other basketball players will be unhappy about this arrangement but the other baseball players will be satisfied? Nonetheless, why would an economist say that this is an efficient way to allocate players for your dormitory’s sports teams?

 

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