International Economics: Class Activity

From: Prof. Dr. Abdul Waheed

1. A certain economy produces only two consumer goods, X and Y. Only labor is required to
produce both goods, and the economy’s labor force is fixed at 100 workers. The table indicates
the amount of X and Y that can be produced daily with various quantities of labor.

Number of Workers 0 20 40 60 80 100

Daily X Production 0 10.0 20.0 25.0 27.5 30.0
Daily Y Production 0 150 250 325 375 400

a. What is the opportunity cost of producing the first 10 units of good X? What is the opportunity
cost of producing the next 10 units of X (i.e., from 10 to 20)?

b. Suppose that a central planner in this economy was to call for an output combination of X = 35
and Y = 150. Is this plan attainable? Explain.

c. New technology is developed in X production, so that each worker can now produce double
the daily amount of X indicated in the schedule. Can the planner’s output combination in (b) now
be met?

2. Below are the hypothetical production possibilities tables for Bahrain and KSA.

Product Bahrain’s production alternatives KSA’s production alternatives

A B C D R S T U
Apple 0 40 80 120 0 40 80 120
Plums 30 20 10 0 120 80 40 0

a. What is each country’s cost ratio of producing plums and apples?

b. Which nation should specialize in which product?

c. Suppose the optimum product mixes before specialization and trade were alternative B in
Bahrain and S in KSA. What would be gains from specialization and trade?

3. (a) Suppose the production of 200 tons of wheat requires $600 capital and 400 workers in UK
and KSA. The production of 800 computers requires $1200 worth of capital and 240 workers in
UK and KSA. Which good is labor intensive and which is capital intensive?

1
(b) Suppose the UK has 1000 million workers and $8000 million worth of capital. The KSA has
$300 million worth of capital and 600 million workers. Which country is capital abundant and
which is labor abundant?

(c) Which country will export which good?

4. Fill in the blanks

A. Consider the following table.

If U.S exchange 16W for 16R with Per Hour Production of Labor
U.S U.K
U.K. U.S. gain (1) ___________and Wheat (W) 16 4
Rice (R) 12 8
U.K. gain (2) __________. The range

for mutually beneficial trade is (3) ___________________________.

Suppose wage rate in US is $24 per hour and in UK is £4 per hour. If exchange rate is

£4 = $8. The dollar price of Wheat in UK is (4) _________and dollar price of Rice in

U.K is (5) __________.The pound price of Wheat in US is (6) ________ and pound

price of Rice in U.S is (7)_________. B. The Mercantilists’ views were:

(8) ___________________________________ (9) ______________________________

(10) ___________________________________ (11) ____________________________

C. Reasons for different production frontiers are:

(12) _________________________________ (13)._____________________________

D. Slope of Community Indifference curve is known as (14) _______________________

E. Domestic trade is different from International trade on the basis of:

(15) _________________________________ (16) ____________________________

(17) _________________________________ (18) ____________________________

F. Slope of Production Possibility frontier is known as (19) _______________________

G. If opportunity costs are increasing PPF is (20) _____________________ to the origin.

2
I. Reasons for constant opportunity costs are: (21) _____________________________

(22) _____________________________________.

5. The production possibility boundaries in the graphs below are for two countries, A and B, that
have the same resource inputs available, but different costs of production related to different
technologies. Thus, a country with a more advanced technology will be able to produce more of
a good from the same inputs, as shown by the endpoint of its production possibility boundary.

(a) (i) In panel (a), in what good(s) does country A have an absolute advantage?

(b) In panel (b), in what good(s) does country A have an absolute advantage? In what good does
it have a comparative advantage?

(c) In panel (c), in what good(s) does country A have an absolute advantage? In what good does
it have a comparative advantage?

(d) In panel (d), in what good(s) does country A have an absolute advantage? What is the cost
of producing X in each country? Which country has a comparative advantage in producing
X?

6. (a) Suppose the production of 100 tons of wheat requires $300 capital and 200 workers in UK
and KSA. The production of 400 computers requires $600 worth of capital and 120 workers in
UK and KSA. Which good is labor intensive and which is capital intensive?

(b) Suppose the UK has 500 million workers and $4000 million worth of capital. The KSA has
$150 million worth of capital and 300 million workers. Which country is capital abundant and
which is labor abundant?

(c) Which country will export which good?

3
7. Use the graph to answer the following questions. Note that country-A initially produces and
consumes at X = 72 and Y = 50, and country-B initially produces and consumes at X = 50 and Y
= 72.

(a) Country-A has comparative advantage in ___________ and country-B has comparative

advantage in _________.
(b) After specialization, the total production of X for both countries together is now _________ ,

instead of the before-trade ___________ . Total production of Y had likewise increased to

___________ , instead of the before-trade ___________.

(c) If equal consumption of both commodities by each country occurs in the new equilibrium,

then each country will consume __________ X and __________ Y. That means country-A will

export ____________ in return for _____________ .

4
8. Consider a country imposing ad valorem tariff on import of good X, as shown in the figure
below. Answer the questions that follow based on the figure.

P$
S

40

25 Price after tariff

10 Free trade Price

D
X
100 300 900 1200

a. What is the price of the commodity in autarky?

b. What is the domestic production, domestic consumption and import with free trade?

c. What is the percentage of ad valorem tariff?

d. What percentage of ad valorem tariff will result zero import.

e. Is this a case of small country or large country?

f. What is the domestic production, domestic consumption and import after tariff?

g. What is loss in consumer surplus, gain producer surplus, tariff revenue and dead weight
loss after tariff?

h. Whether there is net welfare gain or net welfare loss after imposition of tariff by this
nation? Calculate.

5
9. Given the following information for Country-A imposing a tariff on imports of good X, Use
this information to answer the next questions. (1 point each)

No trade price in A $300 per unit

free trade price in A $200 per unit
price in A, with tariff $240 per unit
consumption in A, free trade 1,0000 units
consumption in A, with tariff 9000 units
production in A, free trade 6000 units
production in A, with tariff 800 0its
801
a. Using the above information, how much are total imports before tariff and after tariff?

b. Using the above information, how much are the effects of this tariff on producer’s surplus?

c. Using the above information, how much are the effects of this tariff on consumer’s surplus?

d. Using the above information, how much is the net effect on welfare of this tariff?

10. Consider a country imposing quota on import of good X, as shown in the figure below.
Answer the questions that follow based on the figure.

Px ($)

Sx
10

E
6
G` J` H`
5
G J H K
4
D`x
A C M N B
2 Dx

X
0 20 40 50 60 80 100 110 120 130 140

6
 a. What is the domestic consumption, production and import at free trade price of $2?

b. What is the domestic consumption, production and price after import quota of 60X?

c. What is loss in consumer surplus, gain in producer surplus and dead weight loss after
import quota?

d. What percentage of ad valorem tariff is required to get the same 60X import?

e. Suppose there is import quota of 60X and demand increases from Dx to D’x. What is the
new price, domestic consumption, domestic production and import after this change in
demand?

f. Suppose there is 100% ad valorem tariff and demand increases from Dx to D’x. What is
the new price, domestic consumption, production and import after this change in
demand?

g. Whether there is net welfare gain or net welfare loss after imposition of quota by this
nation? Calculate.

11. Given the following information for Nation-1 imposing a quota on imports of good X. Use
this information to answer the next questions.

No trade price in N-1 $30 per unit

free trade price in N-1 $20 per unit
price in N-1, with quota $24 per unit
consumption in N-1, free trade 1,000 units
consumption in N-1, with quota 900 units
production in N-1, free trade 600 units
production in N-1, with quota 800
its

a. How much are total imports before quota and after quota?

b. How much are the effects of this quota on consumers’ surplus?

c. How much are the effects of this quota on producers’ surplus?

d. How much is the net effect of this quota on welfare of this nation?

e. Using the above figure, if this country wants to impose an equivalent tariff that raises domestic
price by the same amount as this quota does. How much would be the size of such tariff?

7
12. Fill in the blanks
1. _______________ is a tax or duty levied on the traded commodity as it crosses a national

boundary. _______________________ is a duty on the imported commodity and

__________________________ is a duty on the exported commodity.

2. ___________________ is a duty expressed as a fixed percentage of the value of the trade

commodity.

3. ___________________ is a duty expressed as a fixed sum per physical unit of the traded

commodity.

4. ______________ is a direct quantitative restriction on the amount of a commodity allowed to

be imported or exported.

5. _________________________________ is the case where an importing country induces

another nation to reduce its exports of a commodity “voluntarily,” under the threat of higher all-

round trade restrictions.

6. In case of quota an increase in demand will leave ________________ unchanged, but will

result in a __________domestic price and __________domestic production.

7. In case of tariff an increase in demand will leave the domestic __________________, and

domestic ____________________ unchanged, but will result in higher

_____________________ and __________________.

8. _________________________________: an organization of suppliers of commodity located

in different nations that agrees to restrict output and exports of the commodity with the aim of

maximizing or increasing the total profits of the organizations.

9. ___________________________ is the export of a commodity at below cost or at least the

sale of a commodity at a lower price abroad than domestically.

8
10. _________________________ is the continuous tendency of a domestic monopolist to

maximize total profits by selling the commodity at a higher price in the domestic market than

internationally (where it must meet the competition of foreign producers).

11. ________________________ is the occasional sale of a commodity at below cost or at a

lower price abroad in order to unload an unforeseen and temporary surplus of the commodity

without having to reduce domestic prices.

12. Argument: A tariff needs to be imposed to make the price of imports equal to domestic prices

and allow domestic producers to meet foreign competition. (True/False/ Questionable).

_____________.

13. Argument: Trade restrictions are needed to protect domestic labor against cheap

foreign labor (True/False/Questionable). _________________________.

14. Argument: Protection is needed to cure a deficit in the nation’s balance of payments.

(True/False/ Questionable). ______________.

15. Argument: Protection is needed to reduce domestic unemployment.

(True/False/Questionable). __________________________.

16. Trade protection benefits ______________________ and harms _________________ .

17. Three basic principles of GATT are ___________________________,

_____________________________, ______________________________________
18. Following are the few outcomes of the Uruguay Round (1986-1993):

* Tariffs on _________________________ products were to be reduced or removed.

* Quotas on _________________ products and textiles were to be replaced with tariffs.
* Subsidies on ______________________ exports were to be reduced.
* ______________________________________ is to be replaced with the WTO.

19. Following are the outstanding trade problems:

 Rising _______________________. protection on __________________ product,

9
  ______________________ and _________________ issues.

13. Consider the following graph for home country N2. Before custom union, price of x in N1 is
$2 and in N2 is $6.

a. What is the price of x in N2 with 100% tariff?

b. What is the domestic demand, domestic supply and import in N2 with 100 % tariff?

c. What is the price of x, domestic demand, domestic supply and import in N2 after
formation of custom union with N1.

d. What is the effect of custom union on welfare of N2?

10
14. Consider the following graph for home country N2. Before custom union, price of x in N1 is
$2, N2 is $6 and N3 is $3.

a. What is the price of x in N2 with 100% tariff?

b. What is the domestic demand, domestic supply and import in N2 with 100% tariff?

c. What is the price of x, domestic demand, domestic supply and import in N2 after
formation of custom union with N3.

d. Which area in the graph is the welfare gain and which area is the welfare loss after
formation of custom union with N3?

15. The price indices of exports and imports, and a quantity index of exports are contained in the
table below for a developing country.

Export price Import Price Export Quantity

Years
Index Index Index
2012 100 100 100
2013 120 140 125
2014 125 145 155

a. Calculate the commodity terms of trade for the years 2013 and 2014 and comment on it.

b. Calculate the income terms of trade for the years 2013 and 2014 and comment on it.

11
16. Fill in the Blanks.

1. _______________________________ refers to the commercial policy of discriminately

reducing or eliminating barriers to trade between a selected group of countries.

2. NAFTA stands for _______________________________________________________

3. ____________________________removes all barriers to trade among members and

harmonizes trade policies toward the rest of the world.

4. ____________________________________ occurs when some domestic production in a

member nation is replaced by lower-cost imports from another member nation.

5. Dynamic benefits from customs unions are_____________________________________,

_____________________________________and ______________________________.

6. ________________________________ occurs when lower-cost imports from outside the

customs union are replaced by higher-cost imports from a member nation.

7. EU stands for _________________________________________

8. ______________________________________responsible for addressing citizen

complaints about maladministration by any EU body.

9. The objectives of NAFTA are to eliminate barriers to trade between (name the countries)

_________________, _______________________, and ____________________.

10. ASEAN stands for ______________________________________________________.

11. ____________________________________ is an improvement in society’s quality of

life or standard of living.

12. International trade allows each trading country to consume beyond its domestic ability to

produce. This is the ______________________ gain from trade.

12
13. _______________________________ growth is the situation where a nation’s terms of

trade deteriorate so much as a result of growth that the nation is worse off after growth

than before.

14. International investment flows are: _______________________and _________________

15. _________________________________ own, control, or manage production and

distribution facilities in several countries.

16. The loss of skilled workers due to international migration is known as

_______________________.

/////////////////////////////////////

13