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.

11a)

7Marks

Which country has an absolute advantage in S? Which one in C? Explain your answer explicitly describing what quantities you compare to draw your conclusion.

11b)

5Marks

What is the real wage in Northland in terms of S and in terms of C? Show the formula underlying your calculations.

11c)

7Marks

Which country has a comparative advantage in S? Show the formulas underlying your calculations of the relative prices and explain your answer.