Lecture_6_post - 9/15/2008 Home NoTrade Solution Lecture 6...

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9/15/2008 1 Lecture 6 Economics 3610 Cornell University Fall 2008 Home No Trade Solution 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 Assume the free trade price of P C /P W is 3/2. Between the price of ½ in Home and 1 in Foreign. With trade, Home will be fully specialized in wheat production wheat production. 24 8 1 32 6 WW CC PMPL Therefore P MPL Wages in wheat Wages in cloth ⎛⎞ == > ⎜⎟ ⎝⎠ > > Home can export wheat at the international relative price of 2/3. For each bushel of wheat it exports, it gets 2/3 yards of cloth in return.
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Lecture_6_post - 9/15/2008 Home NoTrade Solution Lecture 6...

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