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International Economics
Faculteit der Managementwetenschappen
Radboud Universiteit Nijmegen
Assignment 2
Abtin Djahani, s3037916
Jorrit Jan Grolleman, s4217578

Khang Duc Tran, s3025136
Inleverdatum: 22-10-2013

  1. Trade and specialization in the Ricardian trade model
A) The production possibility curve of the US. is a straight line that intercepts the computer axis at 80 million ( 160/2) and the soybeans axis at 160 ( 160/ 1). The production possibility curve of Brazil is a straight line that intercepts the computer axis at 40 (160/4) and the soybeans axis at 320 (160/0.5)

U.S. :     aLc / aLs = 2 / 1 = 2
In autarky, it will cost 2 computers per one ton of soybeans for the U.S.
Brazil:   a*Lc / a*Ls = 4 / 0.5 = 8
In autarky, it will cost 8 computers per ton of soybeans   for Brazil.
Because the opportunity costs of the two countries differ and autarky prices as well, there is reason to trade. In this case, The U.S. has comparative advantage in producing computers and Brazil has comparative advantage in producing soybeans.

When The   U.S. and Brazil start trading and only produce the products in which they have a comparative advantage, they will be able to consume more of the products they receive from trade. If The U.S. only produces computers and leave the production of soybeans to Brazil, The U.S. could have 320 tons by trading instead of 160 ton soybeans. Brazil could have 80 computers by trading with The U.S. by trading   instead of their maximum of 40 if they produce it on their own.
B) The lowest relative price at which computers are produced is 2 computers per 1 ton soybeans. The maximum number of computers produced at this price is 80 by the U.S.   Brazil produces 320 ton soybeans and no computers. This gives a maximum relative supply of 1/4 . The supply curve will be flat at the price of 2 from the relative supply of 0 to ¼.   This price holds between prices of 2 and 8 which makes the supply curve vertical. Both countries would...

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