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3. The Classical Model a. Assume Al-A12 hold unless otherwise noted below. Suppose there are two countries, Australia and Japan, and two goods, Steel and
3. The Classical Model a. Assume Al-A12 hold unless otherwise noted below. Suppose there are two countries, Australia and Japan, and two goods, Steel and Bacon. Suppose that Australia is endowed with 18,000 labor hours and Japan is endowed with 12,000 labor hours. The number of hours to produce one unit is given by the following table: Australia Japan Steel 6 9 Bacon 12 3 i. In what range must the terms of trade (relative world price of Steel) lie? ii. Suppose the relative world price (Ps/PR)_1. What happens to the equilibrium values of steel and bacon in Australia and Japan relative to autarky (you may find it helpful to graph out the changes). iii. Explain the relationship between Australian steel production and Japanese steel consumption. b. Discuss the key insights of the Classical (Ricardian) Model. What are some shortcomings of this model? c. Using the table below, find the following: Case Case 2 America China America China Bread 6 15 Bread 10 5 Textiles 2 12 Textiles 4 5 i. the country with absolute advantage in each good ii. the pre-trade relative price of bread iii. which country has comparative advantage in each good iv. the limits to the relative wage rate v. Explain, intuitively, why countries will not trade along the lines of comparative advantage if the relative wage rate is outside of the interval you found in part (iv)
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