Reference no: EM13158796
1. Consider Home and Foreign in a Ricardian world (includes all the assumptions of the Ricardian model). Each country produces two goods, wine and cotton. Each country has 4,800 labour hours available. The accompanying table shows the number of hours required to produce one unit of each good in each country. Answer the following questions using the information given by the table:
a. What is the opportunity cost of cotton in each country? Show your work.
b. Draw the graph of the production possibility frontier (PPF) and the consumption possibility frontier (CPF) in Autarky (before trade).
c. Which country has an absolute advantage in Wine? Explain your answer.
d. Which country has a comparative advantage in Wine? Show your work and explain your answer.
e. Which good does each country produce and export when the equilibrium international relative price of wine in terms of cotton is 1?
f. Suppose the equilibrium international relative price of wine in terms of cotton is 1. Draw the graph of the production possibility frontier (PPF) for each country when they trade. Show the consumption possibility frontier (CPF) and show how the two countries can benefit from free trade. Explain your answer and fully label your graph to get marks.
g. Draw the world relative supply (RS) of wine. Fully label your graph to get marks (Do not draw the world relative demand (RD) of wine yet).
h. Now, suppose that the world relative demand is drawn such that the equilibrium international relative price of wine is at 1. Draw the world relative demand curve of wheat on the diagram above (in part g). Explain which country (countries) benefit(s) (most) from free trade in this case.
i. Now, suppose that the world relative demand is drawn such that the equilibrium international relative price of wine is at 1.25 (=5/4). Draw the world relative demand curve of wheat on the diagram above (in part g). Explain which country (countries) benefit(s) (most) from free trade in this case.
j. Calculate Home country's relative productivity of labour in each sector. That is, you need to calculate PR
LWineHome/ PRL WineForeign and PR L CottonHome / PRL CottonForeign.
Explain your answer.
k. Suppose that the price of wine is $10 per bottle and the price of cotton is $10 per bushel. Calculate the relative wage in Home (the wage of Home relative to the wage in Foreign). Show your work and explain your answer.
l. Show the relative wage in Home lies in between the relative productivity of labour of two sectors using the information you obtained from parts j and k.
m. From the part l, we see that the relative wage in Home lies in between the relative productivity of labour of two sectors. It implies that when goods are freely traded in the context of the Ricardian model, the high wage country can compete with the low wage, or low productivity country can compete with the high productivity country.
Find any relevant article (any kind of articles from magazine, or news from the press or media on line or off line will be fine) which asserts that a country cannot compete with lower wage country or higher productivity country under free trade and discuss their assertion in the context of the Ricardian model.
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