1. Consider the numerical examples of exercise 1 and 2 on page 52 in Krugman and Obstfeld (8th Edition).

Draw the production possibility frontier for each country.

Which country has a comparative advantage in apples, which one in bananas?

Which country has an absolute advantage?

Indicate the range of the international prices within which there will be gains from trade for both countries.

Now imagine that Home's technology is different. It turns out that one unit of Home labor can produce 0.2 apples or 1 banana. What would the pattern of production/trade be in this case? Explain the reason why the trade pattern is the way it is.

2.Take the numerical example we used in class to discuss the Ricardo model.

Draw the world production possibility frontier. (Hint: To do so, ask yourself what world output would be for all possible international prices (Pc/Pw)t). Now assume that both countries consume wine and clothing in equal proportions (i.e., their utility function is of the form U(c,w) = min {c,w}. Wine (w) and clothing (c ) are perfect complements) Now indicate on the graph the exact point on the world production possibility frontier at which the world consumes. Compare that point to the world consumption point before trade and before specialization.

As you notice, there are indeed gains from trade.

The question left is whether a world with free trade is the best of all possible worlds. Convince yourself that it is actually not always the best case. Allow for international mobility of labor. In other words, workers are free to decide where they want to work (at home or abroad). Show us how the production possibility frontier will look like in this case. Convince yourself that indeed, under this scenario, the world is better off than in the case of free trade. Now when you consider the international division of production (i.e., where goods will be produced) with internationally mobile labor, would you say that it is in line with the principle of comparative advantage? Discuss

You should realize while doing this exercise how essential the assumption of the international immobility of labor is for international trade and the theory of comparative advantage.

3.Discuss problems 6 and 9 in Krugman and Obstfeld, p. 52.

4.Your country imports high tech products and exports agricultural products.

Suppose you had any control over future technological developments (You have none, but anyway), would you prefer scenario (a), (b) or (c) and why? (Where necessary, illustrate with a graph using the Ricardo analysis of comparative advantage.)

a. There is a technological revolution abroad in the high tech industry. In other words, productivity increases significantly in the technology sector.

b. There is a productivity increase abroad in the agricultural sector.

c. No technological revolution at all abroad.

5.Answer the problem 7 in Feenstra and Taylor, p. 57

3. Here is the numerical example for #2 in HW2. Country A(Home) Country B(Foreigr good X 1 2 good Y 3 4 Also, many students are asking questions about the labor endowment of #2. So I specify the exact amount of labor. Labor endowment in Home country is 6 and foreign country is the same. 3. Here is the numerical example for #2 in HW2. Country A(Home) Country B(Foreigr good X 1 2 good Y 3 4 Also, many students are asking questions about the labor endowment of #2. So I specify the exact amount of labor. Labor endowment in Home country is 6 and foreign country is the same