# Lecture6 - The Classical Model Lets assume that country A...

This preview shows pages 1–8. Sign up to view the full content.

The Classical Model Lets assume that country A is endowed with 12,000 hours. What would be the maximum amount of S and T that could be produced? County B is endowed with 9,600 hours. What would be the maximum amount of S and T that could be produced?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
PPF of Country A and B T S 2000 4,000 Slope=1/2 Country A 1200 800 T S Slope=3/2
The Classical Model Why is the PPF a straight line? Because of assumption of fixed input-output technology.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The Classical Model By plotting the PPF, we can establish autarky price in both the countries. From chapter 2, we know that slope of the PPF is equal to the country’s relative prices (P s /P T ).
Pretrade Equilibrium in Country A and B T S 2000 4,000 Slope=1/2 Country A Price of S is 1/2 unit of T 1200 800 T S Slope=3/2 K L Country B Price of S is 3/2 units of T

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The Classical Model What would happen to pre-trade solution for each country if the two were allowed to trade? Pre-trade situation: Autarky price of S is lower in A than in B. Autarky price of T is lower in B than in A. Can these price differential still exist after we allow trade?
After trade situation: The demand for S will rise in A and fall in B. Thus, relative price for S will rise in A and fall in B. Similarly, demand for T will rise in B and fall in A.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/10/2011 for the course ECON 2001-1 taught by Professor Nickeyturner during the Spring '11 term at Walden University.

### Page1 / 22

Lecture6 - The Classical Model Lets assume that country A...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online