Determining Comparative Advantage using PPCs – Worked solutions to AP Free Response Questions

Free trade based on the principle of comparative advantage promises to maximize the efficiency with which the world’s resources are allocated. But how do we know whether a country has a comparative advantage in the production of one good over another compared to its potential trading partners?

In this lesson we will work our way through several Advanced Placement Free Response Questions and show how, using production data from a PPC or a production possibilities table, we can calculate opportunity costs for particular goods in different countries, and then determine how countries stand to gain from trade based on comparative advantage.

 

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The J-Curve – Illustrating the Marshall Lerner Condition

This video lesson is part two of a lesson on the Marshall-Lerner Condition and the J-curve. Before watching this video, make sure you have watched the lecture on the Marshall-Lerner Condition.

This lesson will explain how a depreciation of a nation’s currency is likely to affect the nation’s current account balance in the short-run and in the long-run depending on the price elasticity of demand for exports and imports.

After watching the video, read and respond to the discussion questions in the following blog post: The Marshall-Lerner Condition, the J-curve, and the US trade deficit

There is also an in-class research assignment to accompany this lesson. We will do this in my class with HL students over the next two class periods. Elasticity, exchange rates and the balance of payments – understanding the Marshall Lerner Condition

 

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The Marshall-Lerner Condition

This video explains the Marshall-Lerner Condition for determining whether a depreciation of a nation’s currency will improve or worsen its current account balance. The MLC is an application of the total revenue test of price elasticity of demand, and applies to the sections of the Econ course on Balance of Payments and Exchange Rates.

After watching the video, read and respond to the discussion questions in the following blog post: The Marshall-Lerner Condition, the J-curve, and the US trade deficit

There is also an in-class research assignment to accompany this lesson. We will do this in my class with HL students over the next two class periods. Elasticity, exchange rates and the balance of payments – understanding the Marshall Lerner Condition

 

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A Quiz on Exchange Rate Manipulation

These two videos demonstrate the solutions to two questions on a quiz I recently gave my year 2 IB Economics students on exchange rates. Before you watch the videos, consider attempting the quiz yourself. It can be downloaded here: Exchange Rates Quiz

The explanations are done in two videos. Here’s the explanation for Quiz question #1:

And here’s the explanation for #2:

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The Determinants of Exchange Rates in a Floating Exchange Rate system

To understand how a country’s currency might appreciate or depreciate, you must understand the variable that can affect demand or supply for the currency on the forex market. This lesson will introduce a useful acronym (TIPSY) for remembering the determinants of exchange rates, and evaluate the advantages and disadvantages of floating exchange rate systems.


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Calculating the effects of protectionist subsidies – an IB HL exercise

Assume that the government of Bangladesh wishes to increase the production of leather by its domestic leather manufacturers, and simultaneously decrease the amount of leather products imported into the country. The government provides a subsidy of $2 per kilo of leather. The result is as follows:

  • Before the subsidy, the quantity of leather produced in Bangladesh was 10 million kilos, and 20 million kilos were imported at a price of $5 per kilo.
  • After the subsidy, the quantity of leather produced in Bangladesh is 15 million kilos, and only 15 million kilos are now imported. the price is still $5 per kilo.
  • Assume that at any price below $1, the domestic quantity supplied would be zero (in other words, the domestic supply curve begins at $1.
The video below explains how to illustrate the effects of a subsidy on the market for leather in Bangladesh. After watching the video, complete the questions that follow. (You will notice that the video does not answer the questions for you, because it does not calculate the various areas you are asked to calculate below).

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