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Suppose the economists working in the National Department of Planning of Colombia are considering trade deals with different countries: Argentina, Bolivia, Chile, Dominican Republic, and the European Union
Suppose the economists working in the National Department of Planning of Colombia are considering trade deals with different countries: Argentina, Bolivia, Chile, Dominican Republic, and the European Union. Assuming that the only barriers to trade are tariffs (there are no shipping costs, no search costs), and trade deals would eliminate tariffs completely. Workers in Colombia can produce petroleum or coffee under Ricardian assumptions. Answer each question in no more than a sentence or two. a. If Colombia trades with Argentina, the relative price of petroleum will fall in Argentina. In which good does Colombia have a comparative advantage? b. If Colombia trades with Bolivia, output of coffee will fall in Colombia. In which good does Colombia have a comparative advantage? c. If Colombia trades with Chile, real wages in terms of petroleum will rise in Colombia. Is Colombia's autarky relative price for coffee higher or lower than Chile's? d. If Colombia trades with Dominican Republic, an increase in the world relative demand for coffee improves Colombia's terms of trade. In which good does Colombia have a comparative advantage, relative to Dominican Republic? e. If Colombia trades with the European Union, the traded relative price of petroleum is greater than the European Union's autarky relative price of petroleum. Which good does Colombia export?
Expert Solution
a. Columbia has comparative advantage on petroleum. Because relative price of petroleum falls in Argentina, If Columbia trade with Argentina. If Columbia export higher rate of petroleum ,demand for petroleum will reduce and results fall in price level due to higher degree supply. b. Columbia has comparative advantage on petroleum . That's why output of coffee falls in Columbia when they trade with Bolivia. Columbia would specialise in the production and export of Petroleum c. In Columbia, relative price of coffee would be higher than Chile . Because due to higher supply of petroleum, price of petroleum falls and real wage in terms of petroleum rises. There is shortage of coffee in Columbia that is higher demand for coffee in Columbia. So relative price of coffee would be higher d.In relative to Dominican Republic, Columbia has comparative advantage in production of coffee. That is why increase in relative demand for coffee improves the terms of trade in Columbia e.Colombia exports coffee ,because in European Union 's relative price of petroleum is lower than the relative price of petroleum in Columbia. If they exports petroleum , it will reduce demand for their petroleum in European Union due to higher prices
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