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Ricardian Model. Consider two countries:




1. Ricardian Model. Consider two countries: A and B. Labour is the only factor of;production for goods X and Y.;Consider the following matrix of unit labour requirements.;Country A;Country B;X;alx = 4;alx* = 6;Y;aly = 12;aly* = 8;Labor Endowments;48;48;a) Which country has comparative advantage and absolute advantage in producing good;X?;b) What is the autarky relative price of good X for country A? For country B?;c) Draw the world relative supply curve for good X. Label all the axes and the relevant;points.;d) Suppose that the relative demand for good X is given by;(Px/Py) = 1 (1/6)((Qx +Q*x) / (Qy + Q*y)).;What will be the equilibrium world relative price of good X be? How much output;will each country produce? Calculate the equilibrium wage rate w in A relative to that in;B under free trade w/w*.;2. True or False: In the context of the Ricardian trade model, An improvement in a;countrys terms of trade will increase a countrys gains from trade. Support your answer;with a diagram and brief explanation. Note: A countrys terms of trade (TOT) are defined;as the price of its export good divided by the price of its import good.;3.(Ricardian Model) In class we worked through the trade example where Home had a;comparative advantage in cheese (alc /alw < alc* /alw*). The result was that world price ratio;was between the autarky price ratios of the two countries. We showed for the Home;country that the opening of trade resulted in the workers real wage in terms of cheese;remaining the same while the real wage in terms of wine increased.;(a) With the opening of trade what will the nominal wage W* be in the Foreign country?;(You will not be able to find a numerical value here.) Briefly explain.;(b) What will happen with the opening of trade to the Foreign countrys real wage in;terms of cheese and wine? Briefly explain.


Paper#22723 | Written in 18-Jul-2015

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