Suppose countries A and B each have 1000 units of Labor available. Countries A and B can produce two goods, steel and TVs, using the following labor coefficients (labor requirements) per unit of output produced:
Steel (S) TV's (T)
A 1 2
B 1 1
All production occurs under constant opportunity cost conditions (Ricardian technology).
i) Draw the production possibility frontiers (PPF's) of the two countries. Explain. (Place Steel on the horizontal axis.)
ii) Which country has an absolute advantage in steel production? TV production? Which country has a comparative advantage in steel? TV's? Explain.
Therefore, if A and B trade, which country exports steel? TV's? Explain.
iii) In what range must the international relative price of steel (PSteel/PTV) fall in order for trade to take place between A and B? Explain.
iv) Suppose that Country A produces and consumes 250 TV's and 500 units of steel in autarky (no international trade) and Country B produces and consumes 500 TV's and 500 units of steel in autarky. When A and B trade, by how much will world production of steel and TV's change as a result of the trade? Explain.