1. Ricardian Model. Consider two countries: A and B. Labor is the only factor of production for goods X and Y.
Consider the following matrix of unit labor requirements.
|
X
|
Y
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Labor Endowments
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|
Country A
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aLx = 15
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aLy = 3
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60
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|
Country B
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aLx* = 6
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aLy* = 2
|
60
|
Which country has comparative advantage and absolute advantage in producing good X?
What is the autarky relative price of good X for country A? For country B?
Draw the world relative supply curve RS for good X. Label all the axes (relative price of good X on the vertical axis and world output of x relative to y on the horizontal axis) and the relevant points.
Suppose that the relative demand RD for good X is given by:
(Px/Py) = 10 - 12 * ( ( Qx +Q*x) / (Qy + Q*y) ).
With free trade: (i) What will be the equilibrium world relative price of good X be equal to? (ii) Calculate the equilibrium wage rate w in A relative to that in B under free trade: w/w*.