ECO364H5 Study Guide - Midterm Guide: Autarky, Comparative Advantage, Economic Equilibrium

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violetlion387

24 Nov 2014

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Each question is worth 10 points: assume there are two countries home and foreign, that follow all the usual assumptions of the ricardian model. Home has a labor endowment of 1200 labor hours while foreign has a labor endowment of 2400 labor hours. The following is a table of their respective unit labor requirements for each of the two goods x and y that both countries produce. Assume that both countries consume equal amounts of x and y both before trade (under autarky) and after trade as well. Y: home has a comparative advantage in ________________ and foreign has a comparative advantage in ___________________ . The relative price of x in terms of y for home is. Home has comparative advantage in x and foreign has a comparative advantage in y. Px/py = 1: world relative demand of x relative to y is given by the following function: Rd (x/y) = 2 (py/px ) find the world equilibrium trading price.

Related Questions

1. When Home has a comparative advantage over Foreign in cloth,

A. The Autarky relative price of cloth in terms of wine is lower at Home than in Foreign:

B. Foreign must have a comparative advantage over Home in wine

C.Home will specialize in producing cloth when there is free trade

D. Both (A) and (B) are correct

E. (A), (B), and (C) are correct.

2. In the Ricardian Model, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <aLC/ aLW where aLC and aLW are unit labor requirements for cloth and wine in Home and aLC and aLW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. aLC decreases. Then it is the case that:

A. The relative price of cloth (vs. food) may go down.

B. The terms of trade of Foreign must improve

C. The terms of trade of Home may remain unchanged.

D. (A) and (C)

E None of the above

tangerbil699

You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:

	Labor Hours Per Unit of Rice	Labor Hours Per Unit of Cloth
Pugelovia	75	100
Pomerania	50	50

You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.

1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?

2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?

3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?

4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?

5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?

6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.

cerisegiraffe33

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 (P_A/P_B) = 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.

ECO364H5 Study Guide - Midterm Guide: Autarky, Comparative Advantage, Economic Equilibrium

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