Consider a simple Ricardian model in which two countries, Northland (NLD) and Southland (SLD), produce two goods, steel (S) and chemicals (C) using only labour. In NLD, one worker can produce 10 tons of steel per day or 20 tons of chemicals per day. In SLD, one worker can produce 5 tons of steel per day or 15 tons of chemicals per day. Initially, assume countries are in autarky.

11d)

Now assume that Northland and Southland are free to trade and that the relative price of S is equal to 2.5, i.e. , (PS/P_C)^FT=2.5.

What does Northland import and what does it export? Explain your answer

11e)

8Marks

In free trade, what is the real wage in Northland in terms of S and C, respectively? Show the formulas underlying your calculations. Briefly discuss whether workers are better off or worse off in free trade relative to autarky.

11f)

6Marks

What is the Northland nominal wage relative to the nominal wage in Southland? Type out the formula underlying your calculation. Is the nominal wage in Northland greater or smaller than the one in Southland? Does this surprise you? Explain your answer.