Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help me with the question on International Trade: 4. Consider a general model of Ricardian trade with 2 countries (Home and Foreign) and 2

Please help me with the question on International Trade:

image text in transcribed
4. Consider a general model of Ricardian trade with 2 countries (Home and Foreign) and 2 goods (Clothing and Food): unit labor costs are ac and cap in Home and a; and a}; in Foreign. Home and Foreign are endowed, respectively, with L and L'\" units of labor. Workers in both countries have the same preferences represented by a general CobbDouglas utility function U (Dc; D p) = DgCDgF where ,80 and ,8}? are positive constants. Further assume that Home has a comparative advantage in Clothing: an: 1?; (a) Let pT = E; be the relative price of clothing under free trade. What will be the range of DE possible prices for pin that will lead to complete specialization in both countries? In this scenario, what will the world production quantities be? For the remainder of this question, assume that this relationship holds and that both countries are completely specialized in the free trade equilibrium. (b) Write pT in terms of the parameters of the model (the a's, the (3's, and the L's). (Hint: In equilibrium, world demand quantities must equal supply. We determined what world supply levels have to be in the last question). (c) How would a 1% increase in Home's labor force L affect pT? How would a 1% increase in Home's productivities (ac and up both increase by 1%) affect pT? ((11) Write the relative wage % as a function of the parameters of the model. How would a 1% increase in Home's labor force L affect %? How would a 1% increase in Home's productivitiaa (ac and ap- both decrease by 1%) affect %? (e) Describe how an increase in Home's labor force L or an increase its productivity will affect welfare in both countries. In particular, how does purchasing power for each good (wage divided by world trade price) change in each case

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International economics

Authors: Robert J. Carbaugh

13th Edition

978-1439038949, 1439038945, 978-8131518823

More Books

Students also viewed these Economics questions