The paper "International Trade and Payments - Production Possibility Frontier for Ecuador" is a wonderful example of an assignment on macro and microeconomics. Ecuador: The production possibility frontier will be as shown below. Figure 1. Production Possibility Frontier Curve for Ecuador. Adapted from Grath, A. (2012). The handbook of international trade and finance. London: Kogan Page. Columbia: The production possibility frontier will be as shown below Figure 2. Production possibility frontier curve for Columbia Autarky relative prices of oil for each Country This is summarized in the following table Oil Coffee Autarky Price ratio Ecuador 12 8 3O: 2C or 1Oil: 0.67 Coffee Columbia 20 4 5 Oil: 1 coffee or 1 Oil: 0.2 coffee Ecuador has an absolute advantage in the production of both commodities The relative price of oil in the home market 2/3 for Ecuador while 1/5 for Columbia, thus Ecuador has a comparative advantage in both commodities than Columbia.
However, Columbia has a comparative advantage in the production of oil Autarky wages of workers in Ecuador in units per labor of: Coffee per unit of labor=4800/8=600 Oil per unit of labor =4800/12=400 Autarky wages of workers in Columbia in units per unit of labor Coffee per unit of labor=3200/4=800 Oil per unit of labor=3200/20=160 According to the above results, it is observed that Ecuador workers in the oil sector are better off than those in Columbia while those in the Coffee sector are better off in Columbia than in Ecuador. According to free trade assumption, it would be better if Ecuador specializes in the production of oil while Columbia specializes in the production of coffee since it will result into improved earning for workers in both countries. Gain from a 1.0 of Oil/Coffee price ration will be: Ecuador=0.67 Columbia=0.2 Questions based on the table below United States Canada Capital 40 machines 10 machines Labor 200 workers 60 workers According to the above table, United States labor-capital ratio is 200/40 50 while in Canada; the labor-capital ratio is 60/10 or 6.
Thus the United States is labor-intensive than Canada. United States capital-labor ratio is 40/200 or 0.2 while in Canada; the capital-labor ratio is 10/60 or 0.167. Thus the United States is capital-abundant than Canada.
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