Homework 3 Answer

Homework 3 Answer - HW3 Answers 1 There is no need to draw...

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HW3 Answers 1. There is no need to draw graphs for this question: (10 points) a. In the neo-classical model, what is the main basis for trade? Differences in autarky relative prices forms the main basis for trade in the neoclassical model. b. If the home country has a comparative advantage in good Y, what is the relationship between the relative price of good X in the two countries? (P x / P y ) Home > (P x / P y ) Home Good X is relatively more expensive at home. 2. Suppose that two countries (Country I and Country II) have identical increasing-opportunity- costs production-possibilities frontiers (PPFs). Illustrate and carefully explain why, under certain conditions, the two countries can have an incentive to trade with each other. (30 points) IC A (P X /P Y ) A Y A B (P X/ P Y ) B IC B X Differences in tastes in two countries will result in different relative prices of X in the two countries. In the above graph, country A has a preference towards good Y while country B has a preference towards X. Hence the relative price of X in country B is higher than in country A
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