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textiles(t) 36

chocolates(c)32

Free Trade

suppose that the free trade relative price of textiles in terms of chocolate is 2 (i.e) Pt/Pc=2)

1. Calculate the real wages in terms of chocolates and textiles (i.e. w/Pc and w/Pt) for home under free trade.
2. assume textiles is used as a numeraire (i.e Pt=1) calculate the average cost of producing textiles and chocolates in the home country
3. draw the world relative supply curve (use T+T*/C+C* in the horizontal axis and precisely identify all relevant magnitudes) draw a "nice" world relative demand curve that crosses the world relative supply curve at the stated free trade price ratio.