Question 1.

The maximum amount of steel or aluminum that Zambia and Zimbabwe can produce if they fully use all the factors of production at their disposal with the best technology available to them is shown (hypothetically) in Table.

Assume that production occurs under constant-cost conditions.

REQUIRED

a)

i) On graph paper, draw separately the production possibilities schedules for Zambia and Zimbabwe; locate aluminum on the horizontal axis and steel on the vertical axis of each country's graph.

ii) In the absence of trade, assume that Zambia produces and consumes 600 tons of aluminum and 300 tons of steel and that Zimbabwe produces and consumes 400 tons of aluminum and 600 tons of steel. Denote these autarky points on each nation's production possibilities schedule.

b)

i) Determine the MRT of steel into aluminum for each nation.

ii) According to the principle of comparative advantage, should the two nations specialize?

iii) If so, which product should each country produce?

iv) Will the extent of specialization be complete or partial?

v) Denote each nation's specialization point on its production possibilities schedule.

vi) Compared to the output of steel and aluminum that occurs in the absence of trade, does specialization yield increases in output in each country?

vii) If so, by how much in each country?

c)

i) Within what limits will the terms of trade lie if specialization and trade occur?

ii) Suppose Zambia and Zimbabwe agree to a terms-of-trade ratio of 1:1 (1 ton of steel 1 ton of aluminum). Draw the terms-of trade line in the diagram of each nation.

iii) Assuming that 500 tons of steel are traded for 500 tons of aluminum, are Zambian consumers better off as the result of trade?

iv) If so, by how much for each product?

v) Are Zimbabwean consumers better off as the result of trade?

vi) If so, by how much for each product?

d) Define the trade triangle for Zambia outlining what each side represents.

e) Define the trade triangle for Zimbabwe outlining what each side represents

Question 2.

Steel and Auto Production

The hypothetical figures in Table 2.8 give five alternate combinations of steel and autos that Japan and South Korea can produce if they fully use all factors of production at their disposal with the best technology available to them. On graph paper, sketch two separate the production possibilities

schedules of Japan and South Korea. Locate steel on the vertical axis and autos on the horizontal axis of each nation's graph.

a) The production possibilities schedules of the two countries appear concave, or bowed out, from the origin. Why?

b)

i) In autarky, Japan's production and consumption points along its production possibilities schedule are assumed to be 500 tons of steel and 600 autos. Draw a line tangent to Japan's autarky point and from it calculate Japan's MRT of steel into autos.

ii) In autarky, South Korea's production and consumption points along its production possibilities schedule are assumed to be 200 tons of steel and 800 autos. Draw a line tangent to South Korea's autarky point and from it calculate South Korea's MRT of steel into autos.

c)

i) Based on the MRT of each nation, should the two nations specialize according to the principle of comparative advantage?

ii) If so, in which product should each nation specialize?

d) The process of specialization in the production of steel and autos continues in Japan and South Korea until their relative product prices, or MRTs, become equal. With specialization, suppose the MRTs of the two nations converge at MRT = 1. Starting at Japan's autarky point, slide along its production possibilities schedule until the slope of the tangent line equals 1. This becomes Japan's production point under partial specialization.

i. How many tons of steel and how many autos will Japan produce at this point?

ii. In like manner, determine South Korea's production point under partial specialization.

iii. For the two countries, do their COMBINED production of steel and autos with partial specialization exceed their output in the absence of specialization?
iv. If so, by how much for both products?

e) With the relative product prices in each nation now in equilibrium at 1 ton of steel equal to 1 auto (MRT = 1), suppose 500 autos are exchanged at this terms of trade.

i. Determine the point along the terms-of trade line at which Japan will locate after trade occurs.
ii. What are Japan's consumption gains from trade?

iii. Determine the point along the terms of-trade line at which South Korea will locate after trade occurs.

iv. What are South Korea's consumption gains from trade?