International

Question 1

Production Possibilities Frontier

Answer 1

Labour force can produce services or manufactures → L = Lm + Ls

Ym = Am × Lm
Ys = As × Ls

L=Ym/Am + Ys/As

Question 2

Absolute Advantage

Answer 2

If a country can produce more of a good than any other country

Question 3

Comparative Advantage

Answer 3

If a country can produce a good at a lower opportunity cost than any other good

Question 4

Comparative Advantage and PPF

Answer 4

o Steep slope → comparative advantage in services
o Flat slope → comparative advantage in manufactures

Question 5

Solving Ricardian Model (Autarky)

Answer 5

Pm = w/Am
Ps = w/As

PmCm = θwL
Cm = θAmL

PsCs = (1 – θ)wL
Cs = (1 – θ)AsL

Question 6

Solving Ricardian Model (Free Trade)

Answer 6

Cs* = Ys – Cs
where Cs* is country specialising in services only

Cm = Ym - Cm*
where Cm is country specialising in manufactures only