from International Trade Theory and Evidence 1995

l. Show that a country gains increasingly from trade as the world price ratio departs further from the eutarky price ratio. 2. Derive the inequality in Eq. (5.3) using Eqs. (5.1} and (5.2). 3. Suppose that we change Fig. 5.2, making preferences di'erentin the two countries such that Home has an sutarky equilibrium at. Q and Foreign has an sutsrky equilibrium at Q'. Is it possible for the countries to gain from trade? 4. Use the Jim and Janet example of Fig. 5.6 to prove that if three bags of pea- nuts trade for two beers, the price of beer in terms of peanuts is 3/2 = 1.5, not 2/3 = .67. 5. With reference to Section 5.4, show that if there is no pattern of comparative advantage (the ratios of wheat to steel production are the same in the two countries), then no gains from specialization exist. 6. Redraw Fig. 5.8 for the case in which the world price ratio is less than the autarky price ratio. (Ifyou can't do this, you don't really understand the diagram.) 7. Suppose we know that with trade the total amounts of both goods consumed exceed the amounts consumed in euterky. With reference to either Section 5.5 or 5.6, can you prove that the group that is better off with trade could compensate the losers so that both groups end up better off relative to auterky