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Consider a Ricardian model. There are two countries called Australia and New Zealand and two goods called beer and cheese. In Australia the unit labour
Consider a Ricardian model. There are two countries called Australia and New Zealand and two goods called beer and cheese. In Australia the unit labour requirement for a beer is 1 hour and for a cheese is 2 hours. In New Zealand the unit labour requirement for a beer is 4 hours and for a cheese is 1 hour. Australia has an endowment of 100 hours of labour. New Zealand has an endowment of 100 hours of labour.4 Denote the world prices in dollars as A, and P- respectively. Denote the respective quantities of beer and cheese consumed in New Zealand (following trade, of course) as D, and De . Using this notation, write out the budget constraint for New Zealand. Rearrange this budget constraint so that it is clear that the ratio of these world prices is reflected by the slope of the budget constraint. [ D. should be on the left-hand side and the rest of the stuff should be on the right-hand side.] (15 marks)3 Suppose now that we have trade between the countries and the world price is I beer for 2 cheeses. For each country draw in the budget constraint. For each country label the production point on the diagram. (15 marks)
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