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2 Answers: Home's PPF extends from 400 X to 750 Y and has a slope (absolute value) of 1.875. Foreign's PPF extends from 250 X to 750 Y and has a slope of 3.0. In autarky, Home produces and consumes 266.7 X and 250 Y. Foreign produces and consumes 125 X and 375 Y. Note that the PPF's are straight lines by virtue of the assumption that marginal products of labor are constant. (THIS IS NOT THE CASE IN THE HECKSCHER-OHLIN MODEL WITH TWO FACTORS OF PRODUCTION AND DIMINISHING MARGINAL PRODUCTS OF LABOR AND CAPITAL. IN THAT CASE WE GET A CONCAVE PPF EVEN THOUGH THERE ARE CONSTANT RETURNS TO SCALE IN BOTH GOODS.) Y Y 800 750 750 490 375 260 250 266.7 400 X 125 250 375 X Home 270 Foreign 130 C. Suppose the international price ratio in free trade between H and F is p* = 2.0 and that 130 X are exported. Determine which country exports X, how many Y are exported (and by which country) and draw the new equilibrium points in free trade. Calculate gains from trade. Answers: p* = 2.0 means that each X is worth 2 Y in international trade.
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