Lecture_5_post - 9/12/2008 Home NoTrade Solution Lecture 5...

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9/12/2008 1 Lecture 5 Economics 3610 Cornell University Fall 2008 Home No Trade Solution Home Solution with Trade at Foreign’s Prices Cloth, Q C (yards) 50 75 U 1 A 50 100 Wheat, Q W (bushels) B Home production 25 75 37.5 37.5 U 2 Relative price of cloth in Foreign is P C /P W = 1. Relative price of cloth in Home is P C /P W = 2. Therefore Foreign would want to export their cloth to Home—they can make it for $1 and export it for more than $1. The opposite is true for wheat. Home will export wheat and Foreign will export cloth. Both countries export the good for which they have the comparative advantage. International Trade Equilibrium Two countries are in a trade equilibrium when: the relative price of each good is the same in the two countries the amount of each good that the countries want to trade is equal Characterizing the equilibrium Determine the relative price of wheat or cloth in the trade equilibrium Determine production and consumption in both Home and Foreign
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Lecture_5_post - 9/12/2008 Home NoTrade Solution Lecture 5...

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