Home and Foreign invent di erent technologies to produce tools, beyond their production of cheese and wine. The table of unit labor requirements is:
Home Foreign
Tools aLT = 3 aLT = 6
Wine aLW = 2 aLW = 3
Cheese aLC = 5 aLC = 3
Comparative advantage. In which good does Home have the strongest comparative advantage? In which good does Home have the least comparative advantage?
Trade and wages. If the relative wage rate w/w = 1, in what goods will Home specialize? [Hint : You may neglect the relative size of the labor forces for your answer.]
Gains from trade. Do both countries bene t from trade? Present an
educated verbal argument.
Transport costs (transfer question). If transport costs add 50% to the price of a good that is shipped from one country to another, what is the pattern of production and what is the pattern of trade? Will all goods be traded? [Hint : Calculate the total cost of each foreign good to a home consumer and compare it the the cost of the same good when produced at home; then calculate the total cost of a home good to a foreign consumer and compare it the the cost of the same good when produced abroad.]