1. Suppose there are 3 countries in equilibrium in a Ricardian Model: Home, East and West. There are two goods: Hi-tech (H) and Resources (R). Suppose that in the free trade equilibrium, Home and West both specialize in the production of Hi-tech and that East specializes in producing Resources. Suppose that the opportunity cost of producing Hi-Tech is lower at Home than in West.
2. (a) Draw the world relative supply curve (for H/R) as a function of the relative price pH/pR. (b) Draw a world relative demand curve in your above diagram that is consistent with the
3. trade pattern outlined above.
4. (c) Suppose that Home experiences technical progress in the production of Hi-tech (the unit
5. labour requirement in H falls at Home).

(i) What happens to the world relative price pH/pR? (Illustrate with your diagram]. (ii) For each country explain whether the terms of trade worsen or improve.

(iii) What happens to purchasing power of a typical worker in the East? Why? (iv) What happens to purchasing power of a typical worker in the West? Why? (v) What happens to purchasing power of a typical worker at Home? Why?