Question

1. Suppose that, with a given unit of labour, India can produce 40 basketball hoops or 60 basketballs and Nepal can produce 10 basketball hoops or 40 basketballs. This scenario is illustrated below:

	Output
	Hoops (H)	Balls (B)
India	40	60
Nepal	10	40

1. Explain absolute and comparative advantage for India and Nepal?
2. If each country has 1000 person-days of labour, construct each country’s production-possibility curves.

c.If Nepal wants to consume equal amounts of both goods (as many units of hoops as balls), how much of each good will be produced and consumed if there is no trade between the two countries?

d.Assume that the equilibrium terms of trade are 1H=2B. If Nepal still wants to consume equal amounts of both hoops and balls, show its points of production, consumption, and the amounts of exports and imports.

e.Show the gains from trade for Nepal.

Answer 1