I have an Econ question.....

[MrBug708]

(A)What might be a a set of favorable terms of trade for the two countries?
(B) Prove that both countries would be better off in the specialization-trade case than in the no specialization-no trade case.


Here is the chart roughly

Canada Italy
good X good Y good X good Y
A 150 0 90 0
B 100 25 60 60
C 50 50 30 120
D 0 75 0 180


To me, it looks the same for A and the same with B, but that seems to easy. Any ideas?

[MrBug708]

Blah, I can't get the columns to work....

[-Mojo Jojo-]

I'm guessing this is supposed to be about Ricardo's relative advantage theory, but I don't understand what the numbers in the grid are supposed to mean...

[QuikSand]

Well, the obvious answer is "do your own homework."
Or, in MrBug's case, perhaps "do you're own homework."
Regardless, I'll take a stab.

A,B,C, and D are possible production levels for each country.

Canada can produce 150X and 0Y, 100X and 25Y, 50X and 50Y, or 0X and 75Y. In essence, they are "trading" their internal resources on a 2:1 ratio -- for every unit of Y they produce, they have to give up production of 2 units of X.

Italy has different combinations: 90X and 0Y, 60X and 60Y, 30X and 120Y, or 0X and 180Y. Their trading ratio is the opposite -- when they want to increae Y, they only have to give up 1/2 of an X... it's a 1:2 ratio, essentially.

Simply put, Canada is relatively efficient at making X, and Italy is relatively efficient at making Y.

If the two countries were to trade with one another, there are opportunitites for "gains from trade" to the extent that both countries can do better by swapping commodities than they can by just realigning their internal production.

As long as Canada does better than its own 2:1 ratio, they'll be doing better by trading. As long as Italy does better than its 1:2 ration, they will benefit also. Those two ratios essentially become the "terms of trade" for the two countries -- anywhere in between those two points, both countries will have gains.

If Canada offers some of X to Italy, they must demand at least 1/2Y for each X they offer. Similarly, Italy will want at least 1/2X for each Y they offer. The nature of the trade is that they should be able to negotiate something in between ... if the two parties are of equal negotiating power, we might expect them to settle on something close to a 1:1 swap, which lies right in the middle.


As for part B, the proof, just use an example. Let's assume that they agree to a 1:1 trade. Let's' also assume that Canada produces its 150X to begin with, and Italy its full 180Y - each country "specializes" in what it's best at.

Then, the two countries agree to trade: Canada sends 60X to Italy for 60Y. Now, look at where the two countries are:

Canada: 90X, 60Y
Italy: 60X, 120Y

Neither country could have reached this production level on its own, without trade. Italy is easier to see - if they produced 120Y, they would have only been able to produce 30X on their own. The trade has gained Italy 30 extra units of X in the deal -- those are the gains from trade. If Canada had produced 60Y, they would have only been able to generate 30X (that's imputed from the data points, not referring to one in particular) - so they are ahead as well.


Now, MrBug, if you paste all this into your homework, and turn it in, you'll likely get an F.

[MrBug708]

Thanks Quicksand. I still don't really understand, but thanks for your help all the same.

[Easy Mac]

Alll I have to say is, I'm glad I took Econ pass/fail, becuase I slept for half the class.

[MrBug708]

I'm taking both Macro and Micro Econ this quarter. Macro is MUCH more easier then Micro. Then again, it has a lot to do with the teachers....