INTERNATIONAL TRADE FINANCE

1. The tables provide information about Virtual Reality’s production possibilities. TV SETS (PER DAY) COMPUTERS (PER DAY) 0 36 10 35 20 33 30 30 40 26 50 21 60 15 70 8 80 0 A) Calculate virtual reality’s opportunity cost of a TV set when it produces 10 sets a day. B) Calculate virtual reality’s opportunity cost of a TV set when it produces 40 sets a day. C) Calculate virtual reality’s opportunity cost of a TV set when it produces 70 sets a day. D) Using the answer to parts (A), (B) and (C), sketch the relationship between the opportunity cost of a TV set and the quantity of TV sets produced in virtual reality. 2. TV SETS (PER DAY) COMPUTERS (PER DAY) 0 18.0 10 17.5 20 16.5 30 15.0 40 13.0 50 10.5 60 7.5 70 4.0 80 0 (A) Calculate the virtual reality’s opportunity cost of a TV set when it produces 10 sets a day. (B) Calculate the virtual reality’s opportunity cost of a TV set when it produces 40 sets a day. (C) Calculate the virtual reality’s opportunity cost of a TV set when it produces 70 sets a day. (D) Using the answers to parts (a), (b) and (c), sketch the relationship between the opportunity cost of a TV set and the quantity of TV sets produced in virtual reality. 3. Suppose that with no international trade, virtual reality in problem 1 produces and consumers 10 TV sets a day and vital signs producers and consumes 60 TV sets a day. Now suppose that the countries begin to trade with each other. (A) Which country exports TV sets? (B) What adjustments are made to the amount of each good produced by each country? (C) What adjustments are made to the amount of each good consumed by each country? (D) What can you say about the terms of trade under free trade? 4. Suppose that with no international trade, virtual reality in problem 1 produces and consumes 50 TV sets a day and Vital signs produces and consumes 20 TV sets a day. Now suppose that the two countries begin to trade with each other. (A) Which country exports TV sets? (B) What adjustments are made to the amount of each good produced by each country? (C) What adjustments are made to the amount of each good consumed by each country? (D) What can you say about the terms of trade under free trade? 5. Compare the total quantities of each good produced in problems 1 and 2 with the total quantities of each good produces in problem 3 and 4. (A) Does free trade increase or decrease the total quantities of TV sets and computers produced in both cases? Why? (B) What happens to the price of a TV set in virtual reality in the two cases? Why does it rises in one cases and fall in the other? (C) What happens to the price of a computer in the vital signs in the two cases? Why does it rise in one case and fall in the other? 6. Compare the international trade in problem 3 with that in problem 4. (A) Why does virtual reality export TV sets in one of the cases and import them in the other case? (B) Do the TV producers or the computer producers gain in each case? (C) Do consumers gain in each case?