International Economics: Homework 1

1) Chapter 2:

Use a graph to show how general equilibrium is reached when a country is subject to increasing opportunity costs.

Show the PPF with increasing opportunity costs.

Find and label the country's equilibrium production and consumption points and the relative price of S at equilibrium.

Show an alternative equilibrium that is not optimal – does not maximize consumer benefits.

Answers:

** For the third part, draw a CIC below the one shown here that intersects the PPF

2) Chapter 2:

a. Using the PPF describe how the national supply curve for Good S is found. No graphs are required here but you can include them if you like.

b. Using the PPF and CICs describe how the national demand curve Good S is found. No graphs are required here but you can include them if you like.

c. How is the domestic price of Good S determined?

Answers:

a. The national supply curve for Good S is found along the nation’s PPF using different price ratios for Ps/Pt. For each price ratio locate a production point along the PPF that shows the price of S and production of S correlated to that price.

b. The national demand curve for Good S is found along the nation’s PPF using different price ratios for Ps/Pt. For each price ratio locate a CIC tangent to the PPF that shows the price of S and consumption of S correlated to that price.

c. The domestic price of Good S determined by the equilibrium of supply and demand.

3) Chapter 2:

a. Assuming autarky, in a two good economy what is the formula to calculate nominal GDP?

Answer:

a. GDP = P_s x S + P_T x T