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Homework answers / question archive / Principles of Macroeconomics Assignment #8: International Trade Model Answer the questions based on the following production possibilities data for Narnia and Somosa
Principles of Macroeconomics Assignment #8: International Trade Model Answer the questions based on the following production possibilities data for Narnia and Somosa. All numbers are in 1,000's. Narnia Production Possibilities: Computer Chips Fuel Injectors A 80 0 B 60 20 ? 40 40 D 20 60 E 0 80 Somosa Production Possibilities: D Computer Chips Fuel Injectors ? 40 0 B 30 20 ? 20 40 10 60 E 0 80 Questions: I 1. If trade occurs between Narnia and Somosa, which nation should export which product? Why? 2. Assume the countries engage in trade and Narnia exports computer chips to Somosa in exchange for fuel injectors. What is the least amount of fuel injectors Narnia will accept for one computer chip? What is the most amount of fuel injectors Somosa will be willing to trade for one computer chip? 3. Assume that prior to specialization and trade, Narnia and Somosa chose production possibility "C." Now each specialized according to comparative advantage. What will be the resulting gains from trade? Explain.
1)
Narnia is indifferent between fuel injectors and computer chips.as if he had 10 amounts of labour then by employing in production of fuel injector it produces 80 units of fuel injector and by those 10 shift to computer chips produces 80units of computer chips.so the opportunity cost for 1unit of fuel injector is equal to 1unit of computer chip.so Narnia can produce anything he wants.but somosa is not indifferent between computer chips and fuel injectors.by employing 10units of workers in computer chips production there are 40unit of computer chips but shits it fully to fuel injectors cause 80 units of fuel injector production.so opportunity cost of 1unit computer chip is 2units of fuel injectors.so Somosa will be specialised in fuel injector production.and Narnia will produce computer chips.and if trade occurs between this countries then it will be benefical for both.
2)
So we can see here before trade narnia is getting one computerchips for one fuel injectors.so if only he get greater than one injector for one computer chip then only Narnia will trade.on the other hand somosa getting half computer chip in exchange of one fuel injectors so only if he getting greater than half computer chips he will trade otherwise not.this is the terms of trade between two countries.
Now Narnia will consider at least one fuel injector in exchange of one couputer chip.as if he will getting less than one unit of fuel injector from trade then it is loss for narnia as before trade in home market he was getting one fuel injector for exchange of one computer chip.so he could not accept any trade for less than one injector for one computer chip.
Now somosa will give highest 2 fuel injectors for 1 computer chip.as it is he was getting before trade also.but if he had to give more than 2 fuel injectors for 1 computer chip then somosa will loss from trade.so no trade will occur.from that we can get somosa will give highest 2 fuel. injectors for 1 computer chips.
3)if both the country chooses production possiblity C then Narnia will produce 40 fuel injector and also 40 computer chips.and somosa will produce 40 fuel injectors and 20 computer chips.so in this condition if Narnia doesn't want any more fuel injectors then trade is not possible between those two countries.now if trade occur then also terms of trade will between half computer chip to one computer chip for one fuel injector then both the country can gains from trade.
