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Q2. (35 points) The following table shows the output of textile and auto one unit of labor can produce in the U.K. and the U.S.:

Textiles

Autos

United Kingdom

16

4

United States

6

3

A)Which country has an absolute advantage in textiles and which country has an absolute advantage in autos?

B)What is the autarky price ratio of autos relative to textiles in each country?

C)Which country has a comparative advantage in textiles and which country has a comparative advantage in autos?

D)Which product should each country export?

E)Suppose the United States has 300 units of labor available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for the United States.

F)Suppose the international price is set at 1 auto:3 units of textile and the U.S. decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of export good, how much does the U.S. gain (measured in terms of the other good)?

G)Discussion: At what level of international price ratio will all the benefits from trade accrue to the United States?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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