Problem Set 7 International Trade (if you have difficulty be sure to check out the “How to.” Files on BB.

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1)

i)Which nation has the absolute advantage in beer production?

ii) Which nation has the absolute advantage in tomato production? (2 pt)

2)

i) What are the relative prices of beer and tomatoes in Mexico? (2 relative prices)

ii) What are the relative prices of beer and tomatoes in US? (2 relative prices) (4 pts)

3)

i) Which nation has the comparative advantage in beer production?

ii) Which nation has the comparative advantage in tomato production? (2 pts)

4)

i) What does Mexico export?

ii) What does Mexico import?

iii) What does the US export?

iv) What does the US import? (2pt)

5) Suppose that an entrepreneur offered the following trade prices, which would be acceptable to both the US and Mexico? (where B = beer and T = tomatoes) (2 pt)

a) 1B= 4T

b) 1T = 0.167B

c) 1B = 0.25T

6)

i)  Draw the PPC of MEXICO and place TOMATOES on the VERTICAL Axis.

ii) Find the slope of the PPF.

iii) Interpret its meaning. (6 pts)

7) Show graphically how Mexico gains from trade. (Hint use the offer price in #5) (2 points)

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