Consider a world with a continuum of goods, indexed by z e[0, 1]. There are two countries, Home and Foreign and there is only one factor of production, labor, that is available in fixed quantities, L in the Home country and L* in the Foreign country. Countries have different technologies to produce goods. In Home a unit of good z can be made out of a(z) units of labor, while in Foreign a unit of good z can be made out of a*(z) units of labor. We define a relative Home labor productivity schedule A(z) =a*(z)/ a(z) and A'(z) 0 and b*(z) = b(z) furthermore S'b(z)dz = 1 we assume that all markets clear and that there is balanced trade. a. Determine the pattern of specialization, i.e., the range of goods that Home and Foreign will produce. Show a graph and explain. b. Consider a uniform improvement in technology abroad, i.e., a*(z) for all z drops with same percentage. Show what happens on the graph. Also, discuss what it implies for a country's terms of trade. How general in the result that you obtain to assess the effect of technological change on a country's terms of trade? c. Now introduce transportation costs of the iceberg type, so that a fraction g(z) of commodity z that is shooed actually arrives. Show that transportation costs imply, for a given wage w* abroad and w at home that there will be non-trade goods. Indicate this on a graph. d. Consider a decrease in transportation costs (you may assume that it does not alter the equilibrium relative wage of both countries). Show what happens on the graph and discuss the impact on the overall price level in both countries and on the real wage in both countries. Consider a world with a continuum of goods, indexed by z e[0, 1]. There are two countries, Home and Foreign and there is only one factor of production, labor, that is available in fixed quantities, L in the Home country and L* in the Foreign country. Countries have different technologies to produce goods. In Home a unit of good z can be made out of a(z) units of labor, while in Foreign a unit of good z can be made out of a*(z) units of labor. We define a relative Home labor productivity schedule A(z) =a*(z)/ a(z) and A'(z) 0 and b*(z) = b(z) furthermore S'b(z)dz = 1 we assume that all markets clear and that there is balanced trade. a. Determine the pattern of specialization, i.e., the range of goods that Home and Foreign will produce. Show a graph and explain. b. Consider a uniform improvement in technology abroad, i.e., a*(z) for all z drops with same percentage. Show what happens on the graph. Also, discuss what it implies for a country's terms of trade. How general in the result that you obtain to assess the effect of technological change on a country's terms of trade? c. Now introduce transportation costs of the iceberg type, so that a fraction g(z) of commodity z that is shooed actually arrives. Show that transportation costs imply, for a given wage w* abroad and w at home that there will be non-trade goods. Indicate this on a graph. d. Consider a decrease in transportation costs (you may assume that it does not alter the equilibrium relative wage of both countries). Show what happens on the graph and discuss the impact on the overall price level in both countries and on the real wage in both countries