California Southern University Neo classical Trade Economy Discussion Interpret the “neoclassical” trade diagram below (on the next page): a.What is the m

California Southern University Neo classical Trade Economy Discussion Interpret the “neoclassical” trade diagram below (on the next page):

a.What is the meaning of the curve that goes through points F and G? What can we infer from the fact that this curve gets steeper as the quantity of laptop computers increases?

b.What is the meaning of the curves U0 and U1? the tangency points G and E?

c.Assuming that the country’s resources are fully employed, what are the quantities pro- duced in autarky? with free trade?

d.What are the quantities consumed in autarky? with free trade?

e.What are the volumes (quantities) of imports and exports with free trade? Where is the “trade triangle” on this diagram?

f.What is the meaning of the slope of the line FE (in absolute value, i.e., ignoring the fact that it’s negative)? In what units is this slope measured?

g.What would be the meaning of the slope of a line drawn tangent to the production possibility frontier at point G? Why would this line be steeper than line FE? (HINT: in which good does this country have a comparative advantage? How do you know?)

h.How do we see the “gains from trade” on this diagram? Prof. R. Sonenshine
September 2019
International Trade:
Homework 2
(due September 19th)
1. Use the Ricardian model to analyze trade between two countries, Britain (B) and Egypt (E),
each of which can produce two goods, cloth (C) and steel (S), with the following (constant)
marginal products of labor:
MPL (output per worker-hour)
2. Interpret the “neoclassical” trade diagram below (on the next page):
a. What is the meaning of the curve that goes through points F and G? What can we
infer from the fact that this curve gets steeper as the quantity of laptop computers
increases?
b. What is the meaning of the curves U0 and U1? the tangency points G and E?
c. Assuming that the country’s resources are fully employed, what are the quantities
pro- duced in autarky? with free trade?
d. What are the quantities consumed in autarky? with free trade?
e. What are the volumes (quantities) of imports and exports with free trade? Where is
the “trade triangle” on this diagram?
f. What is the meaning of the slope of the line FE (in absolute value, i.e., ignoring the
fact that it’s negative)? In what units is this slope measured?
g. What would be the meaning of the slope of a line drawn tangent to the production
possibility frontier at point G? Why would this line be steeper than line FE? (HINT:
in which good does this country have a comparative advantage? How do you
know?)
h. How do we see the “gains from trade” on this diagram?
-1-
i. What if the country did not have full employment of its resources—where would production
take place? How would this matter for policy? (Think “outside the box”!)
Food
F
C
E
M
B
A
U1
G
N
U0
O
J
H
-2-
K
Computers

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