Production Possibility Frontier (PPF) (5marks)
Graph 1
Graph 1 above illustrates the production choices of two countries, country A and country B.
Assume that country A has chosen point A, and country B has chosen point B. Also assume that the two countries have similar production resources.
Write a paragraph to compare and contrast the choice made by each country. Your answer should include the following and use examples.
• What are capital goods? (1 mark)
• Short term consequences of the choices made by each country (1 mark)
• Long term consequences of the choices made by each country (1 mark)
• Examples (2 marks)
A satisfactory answer would have a minimum of 100 words
Gains from trade (5 marks)
Firm A and Firm B are two firms making backpacks and pencil cases for school children. The following table describes their possible outputs per day.
Table 1
|
|
Backpacks
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|
Pencil cases
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|
Firm A
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4
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or
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600
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|
Firm B
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2
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or
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200
|
a. Based on Table 1, which firm has an absolute advantage in pens and which firm has an absolute advantage in backpacks? Explain your answer. (2 marks)
b. Based on Table 1, which firm has a comparative advantage in pens and which firm has a comparative advantage in backpacks? Show your workings and explain. (2 marks)
c. What is an acceptable exchange rate for a backpack, in terms of pencil cases, in order to make the terms of trade beneficial (better than not trading) for both firms? (1 mark)