Transcription of Problem Set #4 - Answers Trade Models
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Problem Set #4 - Answers Trade Models
SPP/Econ 541 Alan Deardorff Problem Set #4 - Answers Page 1 of 15 X Y A 60 30 B X Y 60 40 Problem Set #4 - Answers Trade Models 1. Consider the two Ricardian economies whose endowments and technologies are those described below. Each has a fixed endowment of labor its only factor of production and can produce two goods, X and Y, using the indicated constant amounts of labor per unit of output: Per-unit labor requirement for producing Endowment of Labor X Y Country A 60 1 2 Country B 120 2 3 a) Draw the production possibility frontiers for each of these countries. b) Calculate their autarky relative prices of good X, px/py. A: autarky px/py = 30/60 = B: autarky px/py = 40/60 = SPP/Econ 541 Alan Deardorff Problem Set #4 - Answers Page 2 of 15 c) Which country has an absolute advantage in good X?
completely specialize in the good in which they have comparative advantage, A in X and B in Y. In units of the good that they still produce, wages are the same as in autarky: A: wA/p X = 1/a LX = 1/1 = 1.0 B: wB/p Y = 1/a LY * = 1/3 = 0.33 In units of the good they don’t produce, wages depend on the price ratio, as follows: A: wA/p Y = (w A/p ...
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