EU trade and Ukraine

Chapter 1: ECONOMIC BASES OF TRADE

Practice Tasks


 

Practice Task 1

Suppose that countries A and B produce two goods – milk and oil, the level of costs for their production is characterized by the data given in the table, and marginal costs of substitution remain unchanged for any production volumes.

 

Country

Productive costs per 1 ton of oil

Productive costs per 1 ton of milk

A

150

100

B

120

120

 

 

  1. Does the country A have an absolute advantage in the production of oil?
  2. Does country B have a comparative advantage in the production of milk?
  3. What goods will the countries A and B export and import under free trade conditions?
  4. To what extent should the ratio of world prices for oil and milk in the conditions of free trade between countries A and B be established?

Practice Task 2

Labour costs (in hours) for the production of linen and cloth in England and Germany are as follows:

 

Linen

Cloth

England

10

2

Germany

12

3

 

 

  1. In the production of what product England has a relative advantage and why?
  2. In what interval will the equilibrium price for linen be located in case of development of trade between the two countries?
  3. Calculate Germany's gain from trade if it specializes in the production of linen.

Practice Task 3

Suppose that the production of a single microscope requires 24 hours of labour and 3 hectares of land. The production of 1 ton of milk requires 4 hours of labour and 8 hectares of land.

  1. If USA has 150 million workers and 200 million hectares of land, and in Latvia - 50 million workers and 40 million hectares of land, then in what proportion will trade two goods between USA and Latvia take place?
  2. Why specialization in real trade can be completely different than follows from the theory of the ratio of factors of production?

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