Eco 6936: Global Trade And Policy

Name Eco 6936 Global Trade And Policy

Construct each country’s PPF based on their labor endowments and unit labor requirements, identify which country has the comparative advantage in producing avocados and bananas, analyze the absolute and comparative advantages in lumber and steel for the U.S. and Canada, determine Portugal’s labor requirement for ham given its labor endowment, and compute Spain’s available labor based on its unit labor requirement for cod fish.

Paper For Above instruction

Understanding the principles of comparative and absolute advantage is fundamental in analyzing international trade and resource allocation. The problem set explores these concepts through various country scenarios involving different products and resource endowments, illustrating how nations specialize and trade based on their relative efficiencies and resource constraints.

The first scenario involves Costa Rica and Panama, both producing avocados and bananas. Costa Rica has a labor endowment of 14,000 units, and Panama has 6,000 units. The unit labor requirements are 0.70 for avocados in Costa Rica, 0.75 in Panama, and 0.50 for bananas in Costa Rica, 0.25 in Panama. To construct each country’s PPF, we calculate the maximum quantities of each product they can produce with their available labor. For Costa Rica, the maximum avocados are 14,000 / 0.70 ≈ 20,000 units, and bananas are 14,000 / 0.50 = 28,000 units. Similarly, Panama can produce approximately 8,000 avocados (6,000 / 0.75) or 24,000 bananas (6,000 / 0.25). These PPFs suggest the possible production combinations where the total labor is fully utilized, illustrating each country’s production frontier.

Identifying comparative advantage involves analyzing the opportunity costs within each country. Costa Rica’s opportunity cost of producing one avocado is the number of bananas it foregoes, which is 0.70 / 0.50 = 1.4 bananas per avocado. In Panama, the opportunity cost of an avocado is 0.75 / 0.25 = 3 bananas per avocado. Since Costa Rica’s opportunity cost is lower, it has a comparative advantage in avocados. Conversely, for bananas, Costa Rica’s opportunity cost is 0.50 / 0.70 ≈ 0.71 avocados, and Panama’s is 0.25 / 0.75 ≈ 0.33 avocados. Panama has the lower opportunity cost for bananas and thus a comparative advantage in banana production.

The second scenario examines the U.S. and Canada producing lumber and steel, with each country having specific labor endowments and unit labor requirements. Constructing their PPFs involves similar calculations, with the maximum output for each product determined by dividing total labor by the unit labor requirement. For example, if the U.S. has an endowment of 100,000 units of labor and the unit labor requirement for lumber is 2, then the maximum lumber production is 50,000 units. The same logic applies to steel and the Canadian endowments.

Determining absolute advantage entails comparing the maximum outputs. The country with the higher maximum output for a given product has the absolute advantage. If the U.S. can produce 50,000 units of lumber and Canada can produce 40,000, the U.S. has the absolute advantage in lumber. For steel, if Canada can produce 60,000 units and the U.S. only 55,000, then Canada has the absolute advantage in steel. Comparative advantage is identified by comparing opportunity costs within each country, calculated by dividing the unit labor requirement of one product by the other. Whichever country has the lower opportunity cost for a product has the comparative advantage in that product’s production.

The third scenario involves Portugal and Spain, each producing ham and cod fish. With Portugal having 40 units of labor weekly, the unit labor requirement for ham is derived from the PPF’s slope, representing the maximum feasible production. If Portugal’s total labor is known and the PPF indicates the maximum ham production when all labor is allocated to ham, the unit labor requirement is the total labor divided by the maximum ham units. For Spain, given the unit labor requirement for cod fish is 0.40, the total available labor can be calculated by dividing its total labor endowment by 0.40, revealing the weekly labor availability.

Overall, these scenarios highlight the importance of resource endowments, opportunity costs, and efficiencies in shaping trade patterns between countries. Countries tend to specialize in the products where they have a comparative advantage, leading to gains from trade. The calculations demonstrate that understanding differences in productivity and resource constraints enables nations to optimize their production and benefit from international trade, aligning well with classical economic theories established by Adam Smith and David Ricardo.

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