The Following Simple Two-Country Question Illustrates How Countries Are Made

question 73

Essay

The following simple two-country question illustrates how countries are made better off by trade in assets. Imagine that there are two countries, Home and Foreign, and that residents of each own only one asset, domestic land yielding an annual harvest of kiwi fruit. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 100 tons of kiwi fruit at the same time as Foreign's land yields a harvest of 50 tons. The other half of the time the outcomes are reversed. The Foreign's harvest is 100 tons, but the Home harvest is only 50.
-Suppose that trade in asset is not allowed but the two countries sign a treaty that guarantees the sending of 25 tons of kiwi in good time by the high output country in that season. What will the outcome be of such a treaty?
Explain why.

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Definitions:

Warranty

A guarantee provided by a seller to a buyer that a product will meet certain specifications or that defective products will be repaired or replaced.

Contingent Liability

A future financial liability that could arise based on the result of a certain event.

Payroll Register

A detailed document recording the payroll information of all the employees in a company, including wages, deductions, and net pay for each pay period.

Net Pay

The amount of an employee's earnings after all deductions, such as taxes and retirement contributions, have been subtracted.