oil AT&T 99% 9:21 AM X HW 1.pdf II. Gains from Trade Suppose the following table provides the production possibilities for the only two countries in the world. These two countries can produce only these two goods. Assume resources are identical in production. Use this information to show how trade benefits the world and the two individual countries. Also assume the countries are able to produce with no idle resources and no production mistakes Silver Diamond Australia 180 270 Canada 180 90 a) Illustrate the production possibilities for these two countries by drawing their PPF, with silver measured on the horizontal axis and diamonds measured on the vertical axis. (Make sure you use a ruler to draw PPFS b) Assuming these two countries decide to remain self-sufficient and not engage in trade with each other, illustrate the consumption possibilities for these two countries by drawing their CPF. How were you able to determine the CPF8? 1 c) Show the actual production levels of each country assuming the countries are self-sufficient and don't trade with each other and allocate half of their resources to the production of each good. Label this point a on the graphs. d) Who has the absolute advantage in producing silver and who has the absolute advantage in producing diamonds? Explain how you determined this e) Who has the comparative advantage in producing silver and who has the comparative advantage in producing diamonds? Clearly show exactly how you were able to determine this f) What would be your trade advice to these two countries? (i.e. who should specialize is what good?) g) Illustrate your trade advice by showing the free trade production levels of each country on its PPF. Label this point b. h) Use the following table to show how free trade with these countries following your trade advice benefits the world. What is the "gains from trade"? What gives rise to this gain in world-wide production? Specialize and free trade Silver Self-sufficient and no trade Diamond Silver Diamond Australia Canada World i) Give a viable trade agreement for these two countries, which shows that both countries are better off with this trade agreement. How much silver will Australia end up consuming and how many diamonds will it end up consuming? How much silver will Canada end up consuming and how many diamonds will it end up consuming? Show this consumption point for each country on its graph. Label the free trade consumption point with the point C. j) For Australia, give a list of who wins from this free trade agreement (and why they win) and who loses (and why they lose)