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23 May 2019
Assume that Home can produce two goods, apples and bananas. The unit labor requirement in apple production is 4, while it is 2 in banana production. Foreignâs unit labor requirement for apples is 8 and it is 2 for bananas. Assume that when these countries trade, Home specializes in apples, Foreign specializes in bananas and the world relative price of apples (PA/PB) = 2.
a. If these countries trade, which country will have a higher wage? Why is this the case?
b. Using a numerical example for prices, show how wages are derived in each country when they trade with each other.
Assume that Home can produce two goods, apples and bananas. The unit labor requirement in apple production is 4, while it is 2 in banana production. Foreignâs unit labor requirement for apples is 8 and it is 2 for bananas. Assume that when these countries trade, Home specializes in apples, Foreign specializes in bananas and the world relative price of apples (PA/PB) = 2.
a. If these countries trade, which country will have a higher wage? Why is this the case?
b. Using a numerical example for prices, show how wages are derived in each country when they trade with each other.
Lelia LubowitzLv2
26 May 2019