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No-trade equilibrium in Egypt Recall, when no trade occurs: Y T * = C T * and Y S * = C S * C

No-trade equilibrium in Egypt

Recall, when no trade occurs: YT*=CT* and YS*=CS*

CT*: consumption of textile (in yards);

CS*: consumption of steel (in pounds).

Draw the production possibility frontier (PPF) of Egypt on a separate diagram with the quantity of cloth (QT*) on the horizontal axis and the quantity of steel (QS*) on the vertical axis. Be sure to show the exact intercepts on the axes; also calculate the slope of the PPF for each country and explain what it means.

What is the equilibrium price ratio PT*/PS* in Egypt?

PT*: price per unit of textile (in $);

PS*: price per unit of steel (in $);

W*: nominal wages in Egypt (in $).

Draw a community indifference curve on the same chart. Assume that the closed economy equilibrium is reached at point A*:

YT*=CT*=30 yards

YS*=CS*=10 lbs

Compute real wages in Egypt, expressed in terms of steel (W*/PS*) and in terms of textile (W*/PT*). Do not forget to add the unit of measurement.

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