Two countries, A and B produce two goods 1 and 2 using a single production factor, labor. Both countries are endowed with the following amounts of labor: La = 180 hours; LB = 720 hours. The unit labor costs are aia = 10; 02A = 30: QB = 40; 428 = 20. hij is the production of good i in country, and y, is the national income of country j. measured in terms of good 1. which is chosen as the numeraire. p is the price of good 2 in terms of good 1. Consumers in both countries have the same preferences and the demand func- tions are: d = 0.5y and dy=0.5(3/p) 2.1 State the characteristics of each country in autarky. 2.2 What is the comparative advantage of each country? If both countries open to trade, what is the free trade equilibrium price? 2.3 At this equilibrium price, how much do both countries produce, consume and trade? Assess the gains from trade and determine if countries do have the interest to trade. 2.4 After a short war between both nations, country A amnexed a province from country B. Consequently, relative population sizes changed. The number 1 of available hours for country B decreases by 20 available hours, while it in- creases by 20 for country A. These bours are now part of endowment of country A. These new workers in A have the same productivities than the rest of workers in A. Assess the gains from trade and determine if countries do have the interest to trade, under the new conditions. Two countries, A and B produce two goods 1 and 2 using a single production factor, labor. Both countries are endowed with the following amounts of labor: La = 180 hours; LB = 720 hours. The unit labor costs are aia = 10; 02A = 30: QB = 40; 428 = 20. hij is the production of good i in country, and y, is the national income of country j. measured in terms of good 1. which is chosen as the numeraire. p is the price of good 2 in terms of good 1. Consumers in both countries have the same preferences and the demand func- tions are: d = 0.5y and dy=0.5(3/p) 2.1 State the characteristics of each country in autarky. 2.2 What is the comparative advantage of each country? If both countries open to trade, what is the free trade equilibrium price? 2.3 At this equilibrium price, how much do both countries produce, consume and trade? Assess the gains from trade and determine if countries do have the interest to trade. 2.4 After a short war between both nations, country A amnexed a province from country B. Consequently, relative population sizes changed. The number 1 of available hours for country B decreases by 20 available hours, while it in- creases by 20 for country A. These bours are now part of endowment of country A. These new workers in A have the same productivities than the rest of workers in A. Assess the gains from trade and determine if countries do have the interest to trade, under the new conditions
