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A series of problems related to comparative and absolute advantage in international trade. Students are asked to determine which country has absolute advantage or comparative advantage in the production of certain goods based on labor productivity data and production possibilities curves. They are also asked to determine the international terms of trade when trade is permitted.
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Problems for Chapter 20
c. i. Each country will specialize in the production of the good for which it has comparative advantage. Y Y Production with free trade Prod. 25 25 12.5 12.5 A Prod. 0 25 50 X 10 20 X COUNTRY A COUNTRY B ii. The international terms of trade are 1 X for 1 Y. Each country will export the good in which it has comparative advantage. Y Y BP 25 25 12.5 Cons. 12.5 Cons. BP 0 25 37.5 50 X 10 12.5 20 X COUNTRY A COUNTRY B Each country consumes outside its production possibilities curve after the trade is complete, and therefore is better off with trade. .