The paper "Aspects of Economics of International Trade" is an amazing example of a Macro & Microeconomics assignment. One country has an absolute gain over another country, if in producing a product it would use fewer resources in its production. Atlantis has an absolute gain in both computer and cloth production over Lemuria. There would be no pattern of specialization and trade between the two islands since Atlantis is efficient in producing both the computers and cloths, this, therefore, means that Atlantis cannot specialize in any of the products. The production possibility frontier for Lemuria and Atlantis computers cloths 0 240 Atlantis 80 0 if they devote half of the hours in the production of the two items 40 120 computers cloths 0 200 Atlantis 100 0 if they devote half of the hours in the production of the two items 50 100 d) A country has a comparative gain over another country if in producing the same product; it would use a lower opportunity cost or marginal cost in the production of the good. opportunity cost in production 1computer 1cloth computer cloth Atlantis 20 10 2 0.5 Lemuria 45 15 3 0.3 Atlantis has a comparative gain in producing computers over Lemuria because it has a lower marginal cost of 2, whereas Lemuria has a comparative gain over Atlantis in producing cloth since it has a lower opportunity cost of 0.3.
Therefore, the pattern of specialization would be; each island to specialize in the production of a good that it has a comparative gain over. Thus, Atlantis should specialize in the production of computers, and Lemuria to specialize in the production of clothes. e) If both specialize in the good in which they have a comparative gain, they would produce; output in specialization computers clothes Atlantis 300 100 Lemuria 24 320 Total 324 420 Question two a) The supply and demand graph for Australia The supply and demand graph for New Zealand b) In the absence of trade, the equilibrium price and quantity for Australia and New Zealand would be; Price($) Quantity(calculators) Australia 15 600 New Zealand 30 600 Australia has a comparative gain in calculator production over New Zealand because is produces at the lowest marginal cost price of $15. c) Australia New Zealand World price supply demand supply demand supply demand 0 0 1200 0 1800 -1200 1800 5 200 1000 0 1600 -800 1600 10 400 800 0 1400 -400 1400 15 600 600 0 1200 0 1200 20 800 400 200 1000 400 800 25 1000 200 400 800 800 400 30 1200 0 600 600 1200 0 35 1400 0 800 400 1400 -400 40 1600 0 1000 200 1600 -800 45 1800 0 1200 0 1800 -1200 With trade, the equilibrium calculators produced are 600, with an equilibrium price of $22.5.
Therefore each country produces 600 calculators. d)When the cost of transporting each calculator from Australia to New Zealand is $5, it would imply that the prices of each calculator to rise so as to cater for the cost of transportation of the computers.
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