PROBLEM ON
INTERNATIONAL TRADE
Assume that the production possibility curves of Indonesia and Malaysia
are linear.
I. Indonesia can produce the following combinations of outputs measured
in thousands of tons. Draw Indonesia's production possibility curve. (Be
sure to label the axes.)
Palm oil Rubber
A. 300 0
B. 0 200 _________________________
II. Malaysia can produce the following combinations of outputs measured
in thousands of tons. Draw Malaysia's production possibility curve. (Be
sure to label the axes.)
Palm oil Rubber
A. 250 0
B. 0 500 __________________________
III. What is the opportunity cost of a ton of rubber measured in terms of
tons of palm oil?
A. In Indonesia? _____________________________
B. In Malaysia? ______________________________
IV. What is the opportunity cost of a ton of palm oil measured in terms
of tons of rubber?
A. In Indonesia? _____________________________
B. In Malaysia? ______________________________
V. In which product does the following country have a comparative advantage?
A. Indonesia? _____________________________
B. Malaysia? ______________________________
VI. Assume that each country divided its resources equally between the production
of rubber and palm oil. How much of each product could each country produce
and consume?
Indonesia Malaysia Both countries
A. Palm oil
B. Rubber
VII. Assume that each country now specializes in producing only one product.
Indonesia produces only palm oil and Malaysia produces only rubber. How
much of each product would each country produce?
Indonesia Malaysia Both countries
A. Palm oil
B. Rubber
VIII. Assume that Indonesia trades 150 thousand tons of its palm oil to
Malaysia for 150 thousand tons of rubber. How much of each product would
each country consume?
Indonesia Malaysia Both countries
A. Palm oil
B. Rubber
IX. Draw the production possibilities curves for Indonesia and Malaysia
and label the curves PPC. Draw the consumption possibilities curves for
Indonesia and Malaysia at the current trading ratio and label the curves
CPC. Indicate the combination actually consumed by each country. (Be sure
to label the axes.)
________________________ __________________________
INDONESIA MALAYSIA
X. How much did each country increase its consumption as a result of specializing
and engaging in international trade?
Indonesia Malaysia Both countries
A. Palm oil
B. Rubber
XI. What would happen to prices of the following products in the following
countries as a result of trade between Indonesia and Malaysia?
Indonesia Malaysia
A. Palm oil
B. Rubber
XII. Who would be hurt by international trade between Indonesia and Malaysia?
In Indonesia In Malaysia
A. Consumers of
B. Producers of
XIII. The Terms of Trade
A. In order to benefit from trade, Indonesia must receive at least _____________
tons of rubber in exchange for the export of 1 ton of palm oil and Malaysia
must export no more than _______________________ tons of rubber in exchange
for the import of 1 ton of palm oil.
B. In order to benefit from trade, Malaysia must receive at least _____________
tons of palm oil in exchange for the export of 1 ton of rubber and Indonesia
must export no more than _______________________ tons of palm oil in exchange
for the import of 1 ton of rubber.