Consider two countries, Home and Foreign and two goods appples and bananas. In the Home country the unit labour requiremrents for apples and bananas are repectively 3 and 2. In the Foreign country the unit labour requirements for apples and bananas are 5 and 1 respectively. The Home country has a labour force of 1200 and the Foreign country has a labour force of 800. Graph the Production Possiblity Frontiers for each of the two countries. What are the prices of apples in terms of bananas in both countries in the absence of trade? Why? Construct the world relative supply function. Suppose that the world relative demand takes the following form: demand for ap- ples/demand for bananas = banana price/apple price. Draw the world relative de- mand curve superimposed on the world relative supply curve. What is the equilibrium relative price of apples under free trade? Describe the pattern of trade. Show that each of the two countries gain from trade. Suppose that instead of 1200 workers the Home country has a labour force of 2400. Find the equilibrium relative price. What can you say about the division of gains from trade between the two countries.
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Consider two countries, Home and Foreign and two goods appples and bananas. In the Home country the unit labour requiremrents for apples and bananas are repectively 3 and 2. In the Foreign country the unit labour requirements for apples and bananas are 5 and 1 respectively. The Home country has a labour force of 1200 and the Foreign country has a labour force of 800.
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Graph the
Production Possiblity Frontiers for each of the two countries. What are the prices of apples in terms of bananas in both countries in the absence of trade? Why? -
Construct the world relative supply function.
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Suppose that the world relative demand takes the following form: demand for ap- ples/demand for bananas = banana price/apple price. Draw the world relative de- mand curve superimposed on the world relative supply curve. What is the
equilibrium relative price of apples under free trade? -
Describe the pattern of trade. Show that each of the two countries gain from trade.
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Suppose that instead of 1200 workers the Home country has a labour force of 2400. Find the equilibrium relative price. What can you say about the division of
gains from trade between the two countries.
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