RICARDIAN MODEL

MANUFACTURE AGRICULTURE ENDOWMENT (output per worker) (output per worker) (number of workers) HOME 10 30 200 FOREIGN 4 8 300 (2 points) (a) Use the above information to illustrate the difference between absolute advantage and comparative advantage. (5 points) (b) Use the data above to show why/how comparative advantage creates an opportunity/impetus to trade. (Hint show autarchy prices differ). Give the intuition. (3 points) (c) Show that there are potential gains from trade. E.g. show that world outputs can rise with reallocations of resources. Give the intuition.(3 points) (d) Show that free trade raises real wages in both countries (use the data in the table above). Assume full specialization in both countries in free trade. Be sure to say who specializes in what in Free trade. (4 points) (e) Given (d), suppose HOME imposed a small tariff on the imported good. Will this alter production of the two goods in HOME? Explain. (Hint. How does the tariff alter domestic prices and how does this alter production?) (3 points) (f) Does this tariff on imports alter real wages? Explain