Question

Leturer: Assoc. Prof Bigshan Karbay respectively. [Here you have to use the CORREL command in Excel)l DO NOT ATTACH YOUR DATA. TECHNI For technical analysis, you need to follow Step 4 Step 4. In order to conjecture the circumstances in these two countries under autarky rent (when there is no trade), consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. mers in both countries There are two goods: shoes and calculators. Consu always spend half of their income on shoes and half of their income on calculators. The only factor of production is labour. Each Italian worker can produce 1 shoe or 2 calculators per unit of time. Each Swedish worker can produce 4 shoes or 2 calculators per unit of time. There are 80 workers in Italy and 60 workers in Sweden. You need to provide conditions in each country by stating: a) Which country has an absolute advantage in shoes? In calculators? b) Which country has a comparative advantage in shoes? In calculators? c) Draw the production possibility frontier for each country and indicate slope (put shoes on the vertical axis and calculators on the horizontal axis). d) Find the autarky relative price of calculators in both countries (i.e,, the price of calculators divided by the price of shoes). e) What is the optimal consumption and production for each country under autarky? PRESENTATION OF RESULTS You need to provide a brief in order to effectively communicate your findings. In brief, you must have the following ingredients: V. your Headline: One possible example is: "A Simple Analysis of Openness for Italy and Sweden: Part I" Data Analysis: In this section, you need to present your data analysis based on your findings in Steps 1.2 and 3. . Technical Analysis: In this section, you need to communicate your technical results based on your findings in Step 4

Answer 1

Hypothatical Ricardian Model: - Two countries: Italy and Sweden Two Goods: Shoes and Calculator's rightarrow labour is the only factor of production rightarrow Identical preference for Both the countries i.e. they always spend half of their income on calculator and rest half on shoes. quantity of labour in Sweden (I_S) = 60 quantity of labour in Italy (I_I) = 80 = > Sweden can produce shoes 4-time higher than Italy (per-unit of labour) and same number of calculator as Italy (per-unit of labour) \r\n = > Sweden has absolute advantage in prodn of shoes where as non has absolute advantage in prodn of calculator. To find the comparative advantage, we must compare the opportunity cost of producing each good in both countries. # Opportunity cost: The best alternative that we large in order to produce one more unit of that good. eg. Sweden produces 4 units of shoes using one unit of labour, where as he could have produced 2-units of calculator

# Absolute Advantage: A country is called to have absolute advantage in production of one good if it can produce that good at a lower per unit cost than the other country.

Now according to Ricardo's Theory of Comparative Advantage If a country has lower opportunity cost of producing a good than the other country than it has comparative advantage in production of that good.

In our example Sweden has lower opportunity cost of producing shoes hence,Sweden has comparative advantage in production of shoes.

Where as Italy has lower opportunity cost in production of calculator hence, Italy has comparative advantage in production of calculator.

c.) PPF shows all the different combination of two goods that a country can produce using all his resources efficiently.

d)

# Autarky price is the price ratio which exists within the country when country is not involved in trade.

For optimality we need CIC to be tangent to PPF and Price ratio must pass through that point.i.e,

Slope of PPF = Slope of CIC = Pc/Ps

where,

Pc = price of calculator

Ps = price of shoes

# CIC = Community Indifference curve

We know the slope of PPF for each country and at optimal price ratios will be equal to them hence we know the price ratio in each country under autarky.

Slope of PPF in Sweden = S/C = 240/120 = 2 ; hence, price ratio in Sweden under autarky = 2.

Similarly,

Slope of PPF in Italy = S/C = 80/160 = 1/2 ; hence, price ratio in Sweden under autarky = 1/2.

e.)

To get the answer of (d) part note that it was given in the question that consumers always spend 1/2th of their income on each good. And also they will be both consuming and producing at the same point under autarky. I leave it on you to find that point.

Hint: You can always use a well behaved cobb douglas to represent a utility function and you can always assume there is only one consumer in the country.