2.Consider the following 'monetized' Ricardian model of international trade. Letw= wage rate,L/unit = the amount of labor time required to make 1 unit of the good in

question,PC= price of cloth,PWn= price of wine, = British pound,esc= escudo (old Portuguese currency). Assume that the exchange rate ise=1esc/1. LetE= England and Pt= Portugal.

a.Fill in the blanks using what we assume in this model.

b.Which country has the comparative advantage in Cloth? Explain how you

figured this out.

c.Give the range in which the exchange rate can 'lie' and still have trade according to comparative advantage.

d.If the exchange rate rose toe=1.2esc/1, which country would tend to 'lose its

advantage?' Explain intuitively.

e.If the wage in England fell to 0.4, which country would lose its incentive to do what? Explain briefly.

Country w/hr L/unit Pc L/unit PWn (1) England E1 ac = 3 hr. awn = 3 hrs. (2) Portugal 0.8 esc ag = 2 hrs. 1.6 esc 3.2 esc