Consider the following model of trade between Vietnam and France....

Consider the following model of trade between Vietnam and France. Assume that there are only these two countries in the world, producing two goods of fish and wheat. Consumers spend one third of their income on fish and two third of their income on wheat. The only factor of production is labour. Each labour in Vietnam can produce 1 unit of fish or 2 units of wheat per unit of time, while each labour in France can produce 2 units of fish or 6 units of wheat per unit of time. Suppose that Vietnam has 1.2 million labours and France has 1 million labours.

(a) Which country has an absolute advantage in fish? In wheat? Which country has a comparative advantage in fish? In wheat? 

 

(b) Find the autarky relative price of fish (the price of fish divided by the price of wheat) in both countries.  

 

(c) Derive the relative demand curve relating the relative price of fish. Solve algebraically and draw the relative demand curve in a diagram with the relative price of fish on the vertical axis and the relative quantity of fish on the horizontal axis  

 

(d) Derive the world relative supply curve and draw it on the diagram created in (c)  

 

(e) Compute the equilibrium relative price of fish under the free trade. Which country produces which good or goods?