Question 4:

John and Sotiris live on beaches on two different islands. They each have eight hourstoworkinaday. Johncangrowanapplein1hourormakeabowlin2 hours. Sotiris can grow an apple in 2 hours or make a bowl in 1 hour. Both John and Sotiris consume equal numbers of apples and bowls.

1. a)Clearly draw and label PPFs for John and Sotiris and their consumption bundle in autarky, with bowls on the vertical axis, showing how you calculated this. Define and find the opportunity cost of an apple on each island and discuss how it can be represented on each PPF. Does John or Sotiris have an absolute or comparative advantage in producing either apples or bowls?
2. (5 marks)
3. b)Now suppose John and Sotiris can freely trade at a price of 1 bowl per apple. Explicitly calculate how much of each good John and Sotiris will produce and consume. How much better or worse off in percentage terms are John and Sotiris? How is this possible?
4. (10 marks)
5. c)Discuss if both free trade and free flows of foreign direct investment (FDI) will always make everyone better off in the world economy, providing examples where access to world markets has made people both better and worse off and explain why the logic of following comparative advantage did or did not work. (10 marks)