Question
Consider the following Ricardian model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world,
Consider the following Ricardian model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: Necklace and Purse. Consumers in both countries always spend one-third of their income on Necklaces and two-thirds of their income on Purses. The only factor of production is worker. Each Home-country worker can produce 2 Necklaces or 2 Purses per unit of time. Each Foreign-country worker can produce 3 Necklaces or 1 Purse per unit of time. There are 60 workers in Home and 30 workers in Foreign. REQUIRED. Answer parts from (a) to (i) based on the above information. (a) Which country has an absolute advantage in producing Necklaces? In Purses? (2 marks) (b) Which country has a comparative advantage in producing Necklaces? In Purses? (2 marks) (c) Find the autarky relative price of Purse in both countries (i.e., the price of Purse divided by the price of Necklace). (2 marks) (d) Under autarky, how many units of each good that each country consumes? (2 marks) (e) Mathematically derive the relative demand curve relating the relative demand for Purse to the relative price of Purse. Next, show what the curve looks like in a diagram (put the relative price of Purse on the vertical axis and the relative quantity of Purse on the horizontal axis). (3 marks) (f) Draw the world relative supply curve of Purse including all relevant numbers (put the relative price of Purse on the vertical axis and the relative quantity of Purse on the horizontal axis). (3 marks) (g) Under free trade, determine the equilibrium relative price of Purse and the equilibrium relative quantity of Purse. (2 marks) (h) Under free trade, how many units of each good that each country produces? (2 marks) (i) Under free trade, how many units of each good that each country consumes?
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