Benefits of Trade

ES2560: Week 10 Benefits of Trade

Trade among nations has been growing faster than the total world GDP. The growth of U.S. exports and imports relative to the U.S. GDP parallels this global trend. Today, exports constitute more than 10 percent of total national production. In some countries, trade accounts for a much higher share of total economic activity.

Tasks:

Consider the table below for the neighboring nations of Northland and West Coast. The table lists the maximum feasible hourly rates of the production of pastries if no sandwiches are produced and the maximum feasible hourly rates of the production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations.

Product

Northland

West Coast

Pastries (per hour)

50,000

100,000

Sandwiches (per hour)

25,000

200,000

Based on the data provided, what is the opportunity cost of producing pastries and sandwiches in Northland?

What is the opportunity cost of producing pastries and sandwiches in West Coast? Which nation has a comparative advantage in producing pastries and which nation has a comparative advantage in producing sandwiches?

Suppose the two nations choose to specialize in producing the goods for which both have a comparative advantage. Both agree to trade at a rate of exchange of one pastry for one sandwich. At this rate of exchange, what are the maximum numbers of pastries and sandwiches that both could agree to trade?

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