Trade - June 20

[Amit Goyal]

June20_Trade.png

[mukund sharma]

@amit sir
please explain this question sir, with the solution
just give hint where to start this problem

[r]

(i) PRE TRADE: CTRY A WILL PRODUCE AS WELL CONSUME (12,6)
                     CTRY B WILL PRODUCE AS WELL CONSUME (10,4); where first is good one and second is
                     good 2
(ii)AFTER TRADE:CTRY B WILL EXPORT GOOD 1 AND CTRY A WILL EXPORT GOOD 2
                       TERMS OF TRADE WILL BE BETWEEN (0.4,0.5) where they represent relative prices of
                        good 1 with respect to good 2

[mukund sharma]

hey @r,
i understood the part a  of the question when their was no trade can u explain me how did u get the second answer and the terms of trade
in advance thank u very much

[aditi5000]

a) Country A : {c1,c2}={12,6}
country B : {c1,c2} = {10,4}

b)Country a has a comparative advantage in production of good 2 and country B has a comparative advantage in production of good 1.
So, they should specialise in those commodities.
However, complete specialisation is not going to be good because then the world output will fall because country A is not as well endowed with labour as country B.

So incomplete specialisation .. but not sure how to solve for equilibrium. I understand that world prices need to be same but how does it get optimised on the world scale.. what are the constraints? for one, production of good1>22 and production of good 2>10 and U country a> 72 and u country b> 40... but not sure how to proceed.

[n.saish]

Hi Aditi, well I solved the second part this way.
Endowments- Country A: (12,6) :: Country B : (10,4)
Budget constraint for A
p1*Ca1 +p2*Ca2 = 12*p1 + 6*p2
Maximizing for Ua = C1C2
Demand for Ca1= (12*p1+6*p2)/2p1
Similarly     Cb1 = (10*p1+4*p2)/2p1
Now  Ca1+Cb1=22
On solving we get p1/p2 = 10/22
Taking p1=1 we get
Ca1=12.6 Cb1=9.4
Ca2=5.73 Cb2=4.27
Thus we can see B exports good 1 and A Exports good 2

[Amit Goyal]

All of you did the first part correctly:
Situation: Autartky,
For country A, optimal consumption and production: (12, 6)
For country B, optimal consumption and production: (10, 4)

For the second part:
Situation: Free trade,
For country A, optimal consumption: (12, 6), optimal production: (2, 11)
For country B, optimal consumption: (10, 5), optimal production: (20, 0)
The price ratio at which goods are traded: p(1)/p(2) = 1/2.
Country A doesn't gain from trade. Country B does.

[tim]

hey cn u pls temme how did u get answer to 1st part i m gettng values...exactly double for both the ctys..

[tim]

ohh got it..there was a calculation error :D

[tim]

how r v supposed to find d production here

[Dr. Strange]

Sir, can you please explain how to proceed for the second part.