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E342-A1SU09 - Economics 342 Assignment#1 May 2009 Due At...

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Economics 342 Assignment #1 May 2009 D. Cox Due : At your TA’s office by 4:30pm Wednesday June3. 1. Ricardian Model . Consider two countries: A and B. Labour is the only factor of production for goods X and Y. Consider the following matrix of unit labour requirements. X Y Labor Endowments Country A a lx = 4 a ly = 12 48 Country B a lx * = 6 a ly * = 8 48 a) Which country has comparative advantage and absolute advantage in producing good X? b) What is the autarky relative price of good X for country A? For country B? c) Draw the world relative supply curve for good X. Label all the axes and the relevant points. d) Suppose that the relative demand for good X is given by: (P x /P y ) = 1 – (1/6)( ( Q x +Q* x ) / (Q y + Q* y ) ). What will be the equilibrium world relative price of good X be? How much output will each country produce? Calculate the equilibrium wage rate w in A relative to that in B under free trade w/w*. 2. True or False: In the context of the Ricardian trade model, “An improvement in a country’s terms of trade will increase a country’s gains from trade.” Support your answer with a diagram
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