International Economics Home Exam 3H

EVALUATION GUIDELINES - Take-home examination EXC 36031 International Economics Department of Economics Start date: 04.05.2020 Time 09:00 Finish date: 04.05.2020 Time 12:00 For more information about formalities, see examination paper. Evaluation guideline. The below answers are minimum answers. To obtain a very good grade, better explanations are required. Problem 1: Ricardian trade theory Consider two countries, Switzerland and France. Both countries can produce cheese and wine, and always consume strictly positive amounts of both goods. Their unit labor requirements and labor endowments are summarized below. Unit labor requirements Labor endowment Cheese Wine Switzerland 100 10 1000 France 200 10 1000 1.1) What does absolute advantage mean? Absolute advantage means that one country is more productive than the other country in producing a good. This means that the unit labor requirement is lower. Which country has an absolute advantage in cheese? Switzerland has an absolute advantage in cheese. Which country has an absolute advantage in wine? No country has an absolute advantage in wine. The unit labor requirement is the same in both countries. 1.2) Explain what we mean by the opportunity cost of cheese in terms of wine. Opportunity cost is the amount of one good one has to sacrifice in order to obtain one unit of the other good. What is the opportunity cost of cheese in terms of wine in Switzerland? The opportunity cost of cheese in terms of wine in Switzerland is 10. In order to increase cheese consumption with one unit, 100 units of labor is needed. These 100 units of labor could have produced 10 units of wine. What is the opportunity cost of cheese in terms of wine in France? The opportunity cost of cheese in terms of wine in France is 20. 1.3) What does comparative advantage mean? A country has a comparative advantage in producing a good if the opportunity cost of producing this good is lower than the opportunity cost of producing the same good in other countries. Which country has a comparative advantage in cheese? Switzerland has a comparative advantage in cheese (10