Consider the Production Possibility Frontiers of two countries, Australia and Brazil. Assume both have linear PPFs and the two countries both produce the same two goods: fruits and grain
Consider the Production Possibility Frontiers of two countries, Australia and Brazil. Assume both have linear PPFs and the two countries both produce the same two goods: fruits and grain
Chapter2: Productions Possibilities, Opportunity Costs, And Economic Growth
Section: Chapter Questions
Problem 14SQ
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Q32
Consider the
Given its resources, Australia can produce either 2 units of grain per day or 1 unit of fruits; Brazil can produce either 5 units of grain or 4 units of fruits. (You may, for your own use, find it helpful to draw the Production Possibilities Frontiers for each country, though these won't be included in the answers you provide in you online responses.)
a. If there were no trade, what would be the local price of fruits in each country, measured in units of grain?
b. If trade is allowed, which country will export fruits and which country will export grain (if any)?
c. What are the gains from trading a unit of fruit if the international price of fruit is equal to the average of the local prices in the two countries?
d. How are the gains from trade distributed? Comment on why the benefits of trade are split between the two countries in this way.
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