1. Assume a Ricardian trade world where there is only one factor of production. We divide the world into two regions, the East and the West. We assume fullemployment.Output per unit of laborEastCorn (tons)Wine (barrels)Labor available461.8 millionWest253 millionThe East consumes 4,800,000 barrels of wine whether it is in autarky (no trade) or engaging in free trade. When trade occurs, the two regions completelyspecialize and trade according to their comparative advantage. The terms of trade are 1 corn = 2 wine. When the two regions move from no trade to freetrade:(a) what will be the gains of trade for the East (in terms of corn)?(b) how much wine and corn will the West consume.(c) explain carefully how the West gains from trade.

Answered: 1. Assume a Ricardian trade world where…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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1. Assume a Ricardian trade world where there is only one factor of production. We divide the world into two regions, the East and the West. We assume full
employment.
Output per unit of labor
East
Corn (tons)
Wine (barrels)
Labor available
4
6
1.8 million
West
2
5
3 million
The East consumes 4,800,000 barrels of wine whether it is in autarky (no trade) or engaging in free trade. When trade occurs, the two regions completely
specialize and trade according to their comparative advantage. The terms of trade are 1 corn = 2 wine. When the two regions move from no trade to free
trade:
(a) what will be the gains of trade for the East (in terms of corn)?
(b) how much wine and corn will the West consume.
(c) explain carefully how the West gains from trade.

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Step 1

Gains from trade are the increase in the consumption opportunities that result from indulging in the free trade of goods and services with other countries of the world. This happens because different countries are endowed with different resources specialized in the production of different goods. Free trade allows the whole world to reap the benefits of such specialization.

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