Question

Question 02 i. The following table shows the number of units per 1-day of labour for garments and mobile phones produced in China and Bangladesh. Mop Garments Mobile phones - China 10 units 4 units Ab.at 3 . - Bangladesh 15 units 5 units a. Calculate the autarky price ratios for both Bangladesh and China. .33 (02 marks) Compra (03 marks) c. Which country has comparative advantage in mobile phones? Which country has comparative in garments? Explain. (03 marks) d. Determine a rate of exchange rate between mobile phones and garments for there to be mutually beneficial trade between Bangladesh and China. (02 marks) e. Assume Bangladesh has 10 days for the production. Bangladesh completely specialises the product which has the comparative advantage and exports 100 units of goods to China. The rate of exchange between China and Bangladesh would be 2.75 units of exports to China for 1 unit of import. Illustrate the gains from trade of M Bangladesh by using production possibility frontier and consumption possibility frontier 276 Tod'

Answer 1

4 10 = = 4 15 a. Autarky price ratio for China will be 0.4 phones per garment or = 2.5 garments per 10 mobile phone. In other words, the opportunity cost of a unit of garment is 0.4 mobile phones and the opportunity cost for a unit of mobile phone = 2.5 units of garments in China. 5 Similarly, the autarky price ratio for Bangladesh will be = 0.33 phones per garment or 15 = 3 garments per mobile phone. In other words, the opportunity cost of a unit of 5 garment is 0.33 mobile phones and the opportunity cost for a unit of mobile phone = 3 units of garments in Bangladesh. b. NA c. As explained above, the opportunity cost of producing mobile phones in China (2.5) is less than that of Bangladesh (3). Hence, China has comparative advantage in terms of mobile phone. Similarly, the opportunity cost of producing garments in China (0.4) is more than that of Bangladesh (0.33). Hence, Bangladesh has comparative advantage in terms of garments. d. China will be willing to sell mobile phones at any price more than its opportunity cost of 2.5 and will be willing to buy garments at any price less than its opportunity cost of 0.4. Similarly, Bangladesh will be willing to buy mobile phones at any price less than its opportunity cost of 3 and will be willing to sell garments at any price more than its opportunity cost of 0.33. Hence, trade price for mobile phones can be in a range of 0.33 to 0.4 and the trade price for garments can be in the range 2.5 to 3.

10 20 e. Bangladesh has 10 days of production and its completely specializes in production of garments. Hence, total garments produced = 15 (10) = 150 units. Out of 150 units, it exports 100 units to China at the rate of 2.75 garments = 1 mobile phone. Hence, Bangladesh will get 100/2.75 = 36.37 units of mobile phones in return. As shown in diagram below, consider that Bangladesh was producing and consuming 50 units of garments prior to trade, which takes *days of production and hence 10 days of production was available. With days, number of mobile phones produces = (5) = 33.33. Hence, the consumption in autarky situation is shown at point E in the diagram. Now, with trade, Bangladesh is able to export 100 units of garments and consume 50 units of garments. In return, it gets 36.37 units of mobile phones from China. Hence, the terms of trade = 36.37 – 33.33 = 3.03 mobile phones. 3 3 20 3 20

50 Mobile Phones 40 (Cy 30 14 20 o SU 100 150 Garments