Ricardo Model: Autarky and Free Trade

Consider a Ricardian Model of two countries (Home and Foreign ) and two goods (Textiles and Wine). The production technologies are specified by the unit labor requirements shown below:

Home Foreign (*)

Textiles(T) 6 6

Wine(V) 6 2

Suppose there are 120 units of labor in each country, consumers have "nice" and identical preferences and both commodities are consumed in autarky.

Justify fully. Use a diagram or an equation when you are able to do so (when drawing PPF's use the horizontal axis for Textiles).

(1) Graph the production possibilities frontier and a possible autarky point for both countries (put

Textiles in the horizontal axis). What are the autarky relative prices pT / pV in each country?

(2) Which country has a comparative advantage in Textiles? In Wine? Why?

Free Trade

Suppose that the free trade relative price of Textiles in terms of Wine is 2, (i.e. pT/pV = 2).

(3) Calculate the real wages in terms of wine and textiles (i.e. w/ pV and w/pT ) for Home under Free

Trade.