Homework Assignment
Graphical Problem
Two nations, Canada and Russia, have the following numbers describing their production and consumption situations prior to and then after trade with each other. The nations, prior to trade, are producing automobiles and wheat. Prior to trade, each nation faces constant opportunity costs. Russia has an MRT of 0.5, and Canada has an MRT of 2. (Please assume that wheat is on the vertical axis and that the quantity of autos is on the horizontal axis). Suppose that in autarky Russia chooses to produce and consume 40 autos and 40 bushels of wheat, and Canada chooses to produce 40 autos and 80 bushels of wheat. Please draw graphs showing the situations for Russia and Canada and then answer, with reference to the graphs, the following questions.
a. Are these initial conditions favorable for trade? If so, which nation has a comparative advantage in which good?
b. If each nation does, indeed, have a comparative advantage, then how much will each nation produce if it completely specializes in the good in which it holds this comparative advantage? What would be the net production gain of both nations combined?
c. Now, suppose the nations do, in fact, engage in trade with each other, and they trade at a ratio of one bushel of wheat for one auto. Please draw the trading possibilities line that now exists for these nations.
d. Suppose that Russia decides to export 60 units of the good in which it has a comparative advantage. Where on your diagram is the new post-trade consumption point for Russia? Has Russia gained in consumption from trade? If so, by how much?
e. Please draw the trade triangle for Russia showing how much it is now going to export and how much it is going to import.
f. Does this trading situation likewise produce favorable results for Canada? Please show where Canada now consumes after it engages in trade with Russia. Does Canada gain from trade? If so, by how much? Please draw the trade triangle for Canada showing the amounts it is going to export to and import from Russia.