I.There are 2 countries, D and F. There are 2 products Shoes and Cheese. Each country has two inputs Labour and Capital. They have identical production functions for both goods.

The objective is to be able to determine the gains from trade and be able to explain them simply and clearly. This would include a brief explanation as to why each country specialized in the good it did and how the gains from trade are measured. The use of correct numerical results is essential to this exposition. The questions provided are to guide you.

Domestic has the following situation:

P_shoes= 0.1*w + 0.3*r

P_cheese= 0.4*w + 0.3*r

P_shoes= 4 $

P_cheese= 6$

Foreign has the following situation:

P_shoes= 0.1*w + 0.3*r

P_cheese= 0.4*w + 0.3*r

P_shoes= 3 $

P_cheese= 7$

1.Initially, the countries operate in autarky - no trade. Complete the table to determine conditions within each country.

Autarky

Domestic

Foreign

w*_D=

w*_F=

r*_D=

r*_F=

w/r =

w/r =

(K/L)_Shoes=

(K/L)_Shoes=

(K/L)_Cheese=

(K/L)_Cheese=

Shoes per w =

Shoes per w =

Cheese per w =

Cheese per w =

Shoes per r =

Shoes per r =

Cheese per r =

Cheese per r =