International Trade Theory/ Ricardo Model

Suppose the world consists of two countries: China and Japan, and of two goods:

Cars (good 1) and Electronics (good 2). For answering this question, let price of good = {1,2} be , total labor in country = {, } be ^j , unit labor requirement in country for good be ^j.

Use a diagram that has the relative price of cars to electronics, 1/2, on the vertical axis, and world relative production (and consumption) of cars to electronics on the horizontal axis, incorporating the world relative demand curve, RD, and the world relative supply curve, RS.

Japan has a comparative advantage in car production. Initially, the equilibrium relative price 1/ 2 is such that each country specializes in only one good. Suppose in China the unit labor requirement of producing electronics, ₂^china , decreases; that is, Chinese productivity in electronics rises. Using your diagram, show how the reduction in ₂^china changes relative world price of cars to electronics, 1/2