E342-A1SU10 - with a diagram and brief explanation Note A...

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Economics 342 Assignment #1 June 2010 Due : At your TA’s office by 4:00pm Friday June 18. 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
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Unformatted text preview: with a diagram and brief explanation. Note: A country’s terms of trade (TOT) are defined as the price of its export good divided by the price of its import good. 3.( Ricardian Model ) In class we worked through the trade example where Home had a comparative advantage in cheese (a lc /a lw < a lc * /a lw *). The result was that world price ratio was between the autarky price ratios of the two countries. We showed for the Home country that the opening of trade resulted in the workers’ real wage in terms of cheese remaining the same while the real wage in terms of wine increased. (a) With the opening of trade what will the nominal wage W* be in the Foreign country? (You will not be able to find a numerical value here.) Briefly explain. (b) What will happen with the opening of trade to the Foreign country’s real wage in terms of cheese and wine? Briefly explain....
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