Econ 310 – Consider the two fictional island nations

Name: _________________________________ Section: ____________International EconomicsEcon 310Total: 11 Points Note: Please show your work. Partial credit will be given, but I need to see your work. Consider the two fictional island nations of San Lorenzo and San Salvatore. Your job is to analyze thepotential for trade between the two nations. Throughout this analysis all 12 assumptions from the bookwill hold, unless specifically stated otherwise. Further assume that both nations are part of a monetaryunion and use the same currency, corporals ©. This means we do not need to consider an exchangerate.1. (4 points)1.a.Given the table below identify the absolute and comparative advantages for each nation(note: the table below lists hours of labor required to produce a unit of rum/cigars).Hours of Labor Required to Produce Rum and CigarsSan LorenzoRum12Cigar3 San Salvatore510 1.b.Suppose that San Lorenzo has 10,000 hours of labor and that San Salvatore has 12,000hours of labor to divide between the rum and cigar production. In the space below, graph theproduction possibilities frontier (PPF) for each country. The graph does not need to be to scale,but you must label the maximum levels of production for rum and cigars. 1.c. In the space below list the range of possible terms of trade (aka trade prices) for rum andcigars. 1.d. In the space below compute the range of relative wage ratios for the two countries. 2. (5 points)2.aNow suppose instead that San Lorenzo has 10,000 hours of labor while San Salvatoreonly has 1,200 hours of labor; while all else remains the same. Does this change the comparativeadvantage for each nation? Explain why or why not? 2b.Suppose that in autarky, San Lorenzo is producing and consuming 583 1/3 units of rumand 1000 units of cigars, while San Salvatore is producing and consuming 80 units of rum and 80cigars. What is a possible trade level of production in each country that will allow both countriesto increase their consumption of both rum and cigars? 2c. Given the trade described in part b, what is the terms of trade? 2d. Given the price found in part c, what is the relative wage ratio for the two countries? 2e. What role does the relative size of each nation play in determining the terms of trade? 3. (1 point) What are some possible reasons why a San Lorenzo or San Salvatore would not want totrade? 4. (1 point) Suppose that rum is requires relatively more capital to produce than cigars. What canyou conclude regarding the relative quantities of labor and capital in the two nations?