Read the article by Nobel prize-winning economist Paul Samuelson that is posted on the course website. Samuelson's article discusses how productivity...
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Hello. I am struggling with this Ricardian Model question. For (d), the question doesn't provide us with the specific world prices, can we still solve it?

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Read the article by Nobel prize-winning economist Paul Samuelson that is posted on the
course website. Samuelson's article discusses how productivity improvements in one country
(China) can affect welfare in another country (the USA). The article caused a bit of a stir
after it was published because it argued that productivity improvements in China might be
harmful for the USA. Some critics of US China trade then interpreted this as support for
the claim that trade with China was bad for the USA. In this problem set, you will use the
Ricardian model of trade that we developed in class to work through Samuelson's arguments.
There are two countries, Home (#) and Foreign (F), and two sectors, 1 and 2. The
marginal product of labor in sector i 6 {1, 2) in country ce {N, F) is denoted by a, and the
total labor endowment in country cis Zo. Goods are produced under perfect competition.
Preferences in each country are identical and given by :
U (G, C) = (00)
In what follows, assume that marginal products of labor are given by :
o =3.
1 = 3
and that labor endowments are:
[ = 1,
L' = 2

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Allowing for international trade
Now suppose that Home and Foreign are allowed to trade goods 1 and 2 freely. Let p,",
ph denote the world prices of the two goods. Assume that in the open economy, there will
be complete specialization, with each country producing only one good.
(d) Which country will specialize in the production of which good? Why? What is the
world supply of each good?
[e ) What is the wage level in each country given world prices pi , py ?
(f ) What levels of consumption, Of and C, does the household in country ; choose given
world prices pi' . P2 .
(g ) How much of each good do Home and Foreign import or export given world prices pl,
(h) What is the equilibrium world relative price py = pp /py ?
(i) What is the value of household utility per capita, 25/L', in Home and Foreign? Which
country gains or loses from trade?

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