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Unformatted text preview: about the gains from trade for both countries. What happened to the wage in China in terms of silk, and in terms of food? Hints: First of all, you can derive the demand for food and silk in each country (for a given vector of prices and income). Since the goods are perfect complements, we will have , so if we substitute this into the budget constraint , we have: , and the same expression would hold for China (remember that I is the countrys income, yet to be determined). Given this expressions, we can calculate the relative demand for silk The relative supply curve will look like a staircase, with the jump. This is the relative quantity of silk produced if Europe specializes in food (and produces 300 units of it) and China specializes in silk (and produces 200 units). We can then calculate the consumption for china. If you multiply and divide by , So you can see the enormous gains from trade that China experiences Similarly, you can find the consumption and production for Europe....
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