Use the two-country Ricardian Model with free trade to graphically analyze the effects of the following changes (one at a time). Assume that the Home country has a comparative advantage in Food (the other good being Cloth), and that in the initial equilibrium, both countries specialize completely. You may assume, if it is helpful, that preferences are identical and homothetic in the two countries. a. Draw diagrams that illustrate the PPF, prices, and indifference curves in the Home and in the Foreign market in this setting (2 figures), as well as the trade equilibrium (supply vs demand). b. Illustrate the effect of an increase in the Foreign labor force in the three diagrams. Explain how relative prices change. c. Illustrate the effect of an increase, by the same percentage in both industries, in the Home country's productivity in producing both Food and Cloth.

Use the two-country Ricardian Model with free trade to graphically analyze the effects of the following changes (one at a time). Assume that the Home country has a comparative advantage in Food (the other good being Cloth), and that in the initial equilibrium, both countries specialize completely. You may assume, if it is helpful, that preferences are identical and homothetic in the two countries. a. Draw diagrams that illustrate the PPF, prices, and indifference curves in the Home and in the Foreign market in this setting (2 figures), as well as the trade equilibrium (supply vs demand). b. Illustrate the effect of an increase in the Foreign labor force in the three diagrams. Explain how relative prices change. c. Illustrate the effect of an increase, by the same percentage in both industries, in the Home country's productivity in producing both Food and Cloth.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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