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Unformatted text preview: If Home and Foreign were to trade freely which
good would each country specialize in and export?
b. Suppose that with international trade, the equilibrium relative price of guns is 3/2.
What are the real wages paid in both countries? Compare these with the autarky
real wages to show whether workers in both countries have gained from trade (i.e.
can buy more of one or both goods.)
c. If technology improves in the Home country so that 1 worker can now produce 6
pounds of butter, what will happen to real wages paid in both countries? d. Going back to assuming that Home country workers can make 4 guns or 5
pounds of butter. Suppose that that Home and Foreign are only two of many
countries in the world, and somehow world prices fall so that the relative price of
butter is 1. Which good would each country specialize in and export? Draw this
new price line emanating from the point of specialization for both countries. Do
both countries still gain from trade? Short Answer Questions: Specific Factors Model
For questions 3-6 regarding the Specific Factors models assume there are two countries (Home
and Foreign), two goods (Manufacturing and Agriculture) and three factors of production
(capital, land and labor) with capital and land being specific to Manufacturing and Agriculture
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- Fall '08