This problem set lays out the theoretical basis of neo-liberalism.If you want to argue against neo-liberalism you must first demonstrate that you understand these concepts. You must then either reject the value assumptions implicit in this model, or otherwise demonstrate why the model does not apply. In practice, the first is easier to do than the second.

As you will see, the model employs a simple disequilibrium process. That is, whenever prices are lower in one market than another, buyers will do better off purchasing their wares in the less expensive market. Sellers will do better off selling their wares in the more expensive market. As long as price differences exist, any party has a comparative advantage and can thus engage in mutually advantageous trade. Trade proceeds as long as the price differences persist.

1. Draw and label a graph with one axis for Public Goods and another for Private Goods. Plot the following coordinates:

Having done this, consider the following questions:

i. What is the additional cost or tradeoff for the production of each successive 10 units of public goods.
ii. What is the cost of increasing the production of private goods by from 40 to 70.
iii. Calculate the per unit cost of a private good in terms of public goods lost in question ii.
iv. Plot on your graph a point in which public goods equal 25 and private goods equal 20. Demonstrate on the graph why this is inefficient. That is, how many more public goods you could have if we insisted upon a production of 20 units of private goods. Show, how many more private goods we could have if we insisted upon production of 25 units of public goods.
v. Plot on your graph a point in which public goods goods equal 50 and private goods equal 90. Use the graph to show why this is an impossible position.

2. Consider the following production possibility curves for two frontier families.

a. Plot these graphs separately.
b. Calculate the costs of a unit of clothing for each family
c. Calculate the costs of a unit of crops for each family.
d. Does either family have a comparative advantage in the production of clothing? In Crops? Explain
e. The costs of production you calculated for each family constitute the internal tradeoffs they face when they produce one more unit of any good. If the families engage in trade with each other and specialize according to their comparative advantages, what prices for clothing are mutually advantageous for each party.
What prices for crops are mutually advantageous.
f. Assume that each family completely specializes in the production of the good in which they have a comparative advantage. If the terms of trade are two units of crops for one unit of clothing, show the position of each party on their respective production possibility frontiers when 10 units of clothing are traded.
g. Use the graph to show whether each party is made better off from trade? That is, have they attained a bundle of goods that they good not have created by themselves.
If transportation costs or taxes of 3 units of crops for every unit of clothing traded, would trade still be mutually advantageous? Why or why not?

3. What factors can account for comparative advantage?

4. Given two nations, one with an abundance of cheap relatively unskilled labor suitable to assembly line work, and another with an abundance of relatively well educated and skilled labor suitable for professional services, consider how the following production possibility curve will affect incomes of skilled and unskilled labor in each country.

Describe the logic of trade between Ozonia and Amazonia.
How does that logic affect the demand for skilled and unskilled labor in both countries.
Does this process lead to increasing or decreasing inequality:
a. Between nations
b. Within nations

Grist for the mill:

If price differences produce incentives for trade, why do price and wage differences persist?
Is specialization by comparative advantage always mutually beneficial?