Problem 1

Suppose Home and Foreign countries (H and F) trade two goods, G1 and G2, and each country is populated with 2 workers (workers can split work time between two industries). At home, one worker can produce either 1 units of G1 or 2 units of G2 in one day. For foreign worker it takes 0.5 days to produce one unit of G1 and 0.2 days to produce one unit of G2.

(a) 5% Calculate the opportunity costs of producing G1 in each country.

(b) 5% Draw a diagram which shows Home country equilibrium with and without trade (production, consumption, relative price, and trade ows). Illustrate gains from trade in this diagram.

(c) 5% Calculate real wage in the Home country before and after trade if free trade relative price of G1 is 2.5.

(d) 5% Calculate the world relative supply of G1 at the relative pricep1= 2:2