International Trade

1. Consider a world with one factor of production (labour), two goods (X and Y, with X being the numeraire), two countries (Home and Foreign). Let the labour requirement for producing an unit of each of the two goods be 1 in the Home country, while it is 2 and 4 to produce an unit of X and Y respectively in the Foreign country. Let both countries be endowed with 100 units of labour. a) What is the pattern of mutually beneficial trade between the two countries? b) Consider a likely trading price and compute the post-trade wage rate in each of the two countries. c) How does the result in part (b) compare with that in a standard Heckscher Ohlin Samuelson (HOS) model? What determines the post-trade wage rates in the HOS model? d) In case a symmetric transport cost of 10% a la Samuelson is introduced in this model, would the pattern of trade under (a) be affected? If so, explain how