1. In a Ricardian world, Home and Foreign produce two goods, Apples and Bananas. In

autarky, both countries produce both goods. The following information is available:

No-trade Equilibrium

Home

Apples

wA = 8BananasMPLA = 3

PB = 2

No-trade Equilibrium

Foreign

Apples Bananas

w

B = 6

MPLB = 1

P

A = 3

(a) What is the marginal product of labour for Apples and Bananas in the Home

country? What is the no-trade relative price of Apples at Home?

(b) What is the marginal product of labour for Apples and Bananas in the Foreign

country? What is the no-trade relative price of Apples in Foreign?

(c) If there is free-trade, which good will each country export?

(d) The wage measured in $ per unit (hour, worker, etc.) is called a nominal wage.

The real wage is the wage, w; measured relative to the price of a consumption

good, i.e. it measures how much a worker earns in units of one of the consumption

goods. In the trade equilibrium, what is the real wage at Home in terms of Apples

and in terms of Bananas? Compare this to real wages at Home with no-trade.

(e) In the trade equilibrium, do Foreign workers earn more or less than those at Home

(in terms of ability to purchase goods).