Consider a two-country, two-goods world, and trade is based on comparative advantage. One

labour can produce 4 phones in both Home (H) and Foreign (F); while the same labour can

produce 2 chairs in Home and 4 chairs in Foreign. Home has 200 workers and Foreign has 300

workers, and both countries agree to trade 150 chairs.

a) Which country will export chairs? Explain.

b) Suppose the free-trade relative price of chair is the average of two countries' autarky relative

price. Find the production and consumption bundles for both countries.

Now, suppose Home experiences a technological breakthrough such that the productivity of

labour increases by 50% in both goods.

c) Which country will export chairs? Explain.

d) Suppose the free-trade relative price of chair is still given by the average of two countries'

autarky relative price. Do you expect the free-trade relative price to change after the

technological breakthrough in Home? Explain.

e) Find the production and consumption bundles for both countries (after technological

breakthrough in Home).

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