Comparative Advantage and the gains from trade
Please answer the following questions, following the instructions carefully.
Assume that Cuba and Venezuela face the production possibilities for oil and medical care shown in the table below:
| Cuba | Venezuela | ||
| Quantity of oil (millions of barrels) | Quantity of Medical Care (millions of patients cared for) | Quantity of oil (millions of barrels) | Quantity of Medical Care (millions of patients cared for) |
| 0 | 5 | 0 | 2.5 |
| 100 | 4 | 200 | 2 |
| 200 | 3 | 400 | 1.5 |
| 300 | 2 | 600 | 1 |
| 400 | 1 | 800 | 0.5 |
| 500 | 0 | 1000 | 0 |
- What is the opportunity cost of caring for a patient in Cuba? In Venezuela? What is the opportunity cost of a barrel of oil in Cuba? In Venezuela?
- Which country has the comparative advantage in producing oil? In medical care?
- Suppose that in autarky, Cuba produces 200 million barrels of oil and cared for 3 million patients[1]; and that Venezuela produces 600 million barrels of oil and cared for 1 million patients. Without trade, can Cuba produce more oil and more healthcare? Can Venezuela?
For questions 4-6, lets assume that each country specializes in the product in which it has the comparative advantage, and the two countries trade.
- What is the total quantity of oil produced by both countries together? How many patients are treated by both countries together?
- Is it possible for Cuba to consume 500 million barrels of oil and to treat 3 million patients, while Venezuela consumes 500 million barrels of oil and treats 2 million patients?
- If the above consumption levels were possible, how much oil and healthcare would each country have to export or import? Do you think the citizens of these countries would be happier in the situation described in question 5 or the situation described in question 3? Why?
- In reality, trading medical care for oil has been a very important part of economic policy in both countries this century, with Venezuela exporting oil to Cuba, and Cuba exporting medical care to Venezuela. Fill in the blanks on the following statement: “Through the lens of the model studied in class, this suggest that the autarky price of oil in Venezuela is ____________ (below/above) the world price of oil, while the autarky price of medical care in Cuba is ____________ (below/above) the world price of medical care.”
- For the next exercise, we will assume, as the textbook does, less than complete specialization in oil and medical care. Draw four neatly labeled graphs. One should depict the supply and demand of oil in Cuba, with and without trade. Be sure to label the autarky price and quantity, the world price, the level of production with trade, the level of consumption with trade and imports/exports. The next three graphs should do the same for medical care in Cuba, for oil in Venezuela, and for medical care in Venezuela.
- Do Cuban oil consumers benefit from the oil trade? How about Cuba oil producers? How about would-be Cuban patients? Cuban medical care providers?
