Question

1. Suppose there are two countries A and B producing two products X...

1. Suppose there are two countries A and B producing two products X and Y. The unit labor requirement for two countries and two products are: a A X = 1; a A Y = 5; a B X = 10; a B Y = 10 Draw the line of product specialization. And discuss the five different scenarios for countries A and B.

For each discussion, list: - If the world relative price falls into ... Country A produces ..., Country B produces ... If the world relative price pW X pW Y (0.2, 1), Draw the graph of "Gains from Trade" for Country A.

2. Now look at both countries A and B, suppose workers in both economies have identical preferences defined by

U: UA = 1ln(C A X ) + 2ln(C A Y ); UB = 1ln(C B X ) + 2ln(C B Y )

where C i X is the consumption level for product X and C i Y is the consumption level for product Y, in country i {A, B}. Suppose Qi j , i {A, B}, j {X,Y} represents the production of product i in country j. New equilibrium world price ratio is: pW X, pW Y . The total employment in both economies are: L A = 100, L B = 100.

Find the following exogenous and endogeous parts for this model open economy model - exogenous parameters - endogenous outcomes And then describe the equilibrium. (similarly: Given exogenous parameters, endogenous variables are solved, if conditions are satisfied.)

Solve for the open economy equilibrium (suppose country A produce both products, type I)