Assume that both the United States and Germany produce beef and computers. The U.S. can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500 computers or 250 pounds of beef per day. What is the opportunity cost of beef and computer chips in each country? In which good does each country have a comparative advantage? What is the range for mutually beneficial trade in
computers?
What will be an ideal response?
In the U.S., the opportunity cost of computers is 5 pounds of beef. The opportunity cost of a pound of beef is 1/5 computer. In Germany, the opportunity cost of a computer is 1/2 pound of beef. The opportunity cost of a pound of beef is 2 computers. Since 1/5 is less than 1/2, the U.S. has a comparative advantage in beef, and likewise, Germany has a comparative advantage in computers. For both nations to benefit, a computer must trade for between 1/5 and 1/2 pounds of beef.
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Which of the following correctly describes free international trade in accordance with comparative advantage?
a. It is typically favored by producers in importing countries. b. It is typically favored by producers in exporting countries, but hated by their workers. c. It is typically favored by producers in exporting countries, including their workers. d. It is typically hated by consumers in importing countries. e. It is typically hated by farmers, but looked upon favorably by manufacturers.
Assume two people, Tom and Rose, live for two periods and are taxed on consumption in both periods. In period 0, Rose has consumption of 50. In period 1, Rose has consumption of 50. Tom has consumption of 40 in period 0. Use the formula below for lifetime consumption tax liability, R i , to find out what Tom's period 1 consumption must be, to ensure that tax liabilities between the two are equal, if the consumption tax rate is 9% and the rate of interest is 4%,
