Economics 342Assignment #1May 2009 D. CoxDue: 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.XYLabor EndowmentsCountry Aalx= 4aly = 1248 Country Balx*= 6aly* = 848a)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:(Px/Py) = 1 – (1/6)( ( Qx+Q*x) / (Qy+ 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 Ricardiantrade 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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wage rate, rental rate, unit labour requirements, autarky relative price