Please answer all sub-part questions. 2. Assume there are two countries (Home and Foreign), two goods (widgets and corn), and one factor of production (labor). Suppose that in the Home country, 1 worker can make 4 widgets or 5 bushels of corn. Suppose that in a foreign country, 1 worker can make 2 widgets or 4 bushels of corn. Home has 100 workers while Foreign has 200 workers. a. Draw the autarky PPF’s and determine the relative prices in each country. Place corn on the horizontal axis. 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 widgets 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. Who are the winners and losers from trade in each country? Compare the winners and losers with an alternative setup where the direction of trade is the same, but each good has a specific factor associated with its production: factories for widgets and land for corn. Explain how factors of production reallocate after the trade and describe what this means for gains from trade. Contrast with the Ricardian model.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please answer all sub-part questions.

2. Assume there are two countries (Home and Foreign), two goods (widgets and corn), and one factor of production (labor). Suppose that in the Home country, 1 worker can make 4 widgets or 5 bushels of corn. Suppose that in a foreign country, 1 worker can make 2 widgets or 4 bushels of corn. Home has 100 workers while Foreign has 200 workers.

a. Draw the autarky PPF’s and determine the relative prices in each country. Place corn on the horizontal axis. 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 widgets 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. Who are the winners and losers from trade in each country? Compare the winners and losers with an alternative setup where the direction of trade is the same, but each good has a specific factor associated with its production: factories for widgets and land for corn. Explain how factors of production reallocate after the trade and describe what this means for gains from trade. Contrast with the Ricardian model.

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