University of British Columbia
Vancouver School of Economics
Econ 455 International Trade
Professor Réka Juhász
email: reka.juhasz@ubc.ca
Winter 2024
a) Suppose both countries trade freely, and the market clearing relative price of cloth
in terms of wine is
p
C
p
W
=
1
2
. Which country produces which good(s) (specialization
pattern) and which good is exported by each country?
(15 marks)
•
Sketch answer: opportunity cost of cloth in France is 1/2, and in Vietnam it is
2/3. Thus, France has a comparative advantage in cloth production, as it needs
to give up fewer units of wine to produce one unit of cloth. At a relative cloth
price of 1/2, France is incompletely specialized as the price is equal to oppor-
tunity cost. For Vietnam, the price of cloth is too low to warrant production,
it only produces wine. France exports cloth in exchange for Vietnamese wine.
b) Draw the world relative supply and demand curves (with
p
C
p
W
on the vertical axis and
C
+
C
∗
W
+
W
∗
on the horizontal axis). Assume consumer preferences can be represented by a
Cobb-Douglas utility function so that the world relative demand curve is downward
sloping and crosses the world relative supply curve at the stated free-trade price
ratio (
p
C
p
W
=
1
2
).
(10 marks)
•
Sketch: RS curve as follows.
C
+
C
∗
W
+
W
∗
= 0
up to a price of 1/2. At a price of 1/2,
RS is horizontal from
C
+
C
∗
W
+
W
∗
= 0
to
C
+
C
∗
W
+
W
∗
= 3
. Between price of 1/2 and 2/3,
C
+
C
∗
W
+
W
∗
= 3
. At a price of 2/3, RS is horizontal from 3 to infinity. RD intersects
RS at price 1/2 and is downward sloping.
c) Suppose technological progress in wine production techniques lowers the unit labor
requirement to
1
in Vietnam. Depict the new equilibrium on the same graph. You
will not be able to find the new equilibrium price with only the information provided
here, but you can give a range in which it must lie. What is that range? Why does
the free trade price move in this direction?
(15 marks)
•
Sketch: New opportunity cost of cloth production in Vietnam is 2. RS curve as
follows.
C
+
C
∗
W
+
W
∗
= 0
up to a price of 1/2. At a price of 1/2, RS is horizontal from
C
+
C
∗
W
+
W
∗
= 0
to
C
+
C
∗
W
+
W
∗
= 1
. Between price of 1/2 and 2,
C
+
C
∗
W
+
W
∗
= 1
. At a price
of 2, RS is horizontal from 1 to infinity. RD intersects RS at
p
C
p
W
≥
1
2
. Price of
cloth weakly rises as productivity growth in wine in Vietnam has increased the
relative world supply of wine, making cloth scarcer and driving up its relative
price.
d) Leave the unit labor requirements as they were originally in the table provided at
the beginning of the question. Suppose instead that an aging population lowers the
population in France to
L
∗
= 200
. Using a graph, show which direction the free
trade price
p
C
p
W
will move in this case.
Explain why productivity growth in wine
production in Vietnam and shrinking population in France have a similar effect on
the free trade price of cloth.
(15 marks)
•
Sketch: A shrinking population in France will decrease the relative world supply
of cloth, and hence (weakly) drive up its price.
The two effects are similar,
because both decrease the relative supply of cloth – part c) by increasing the
supply of wine and part d) by decreasing the supply of cloth.
2
