Discuss the pattern of absolute advantages across the two countries.

2:         (10 points) Now consider the following (I increase foreign productivity in manu):

 

MANUFACTURE

PRODUCTIVITY (output per worker)

AGRICULTURE

PRODUCTIVITY (output per worker)

LABOUR ENDOWMENT

HOME

20

10

100

FOREIGN

25

5

100

a)     
Show how Foreign’s PPF has changed.

b)    
Identify each country’s opportunity costs in each sector. Interpret.

c)     
Who has the comparative advantage in Manufactures?  Agriculture?  Explain.

d)    
Show that a reallocation of resources within each country can raise world output.  Explain the idea behind it. 

e)     
What are autarchy wages and manufacturing prices in each country?  Show and explain how you get your result.  (Set PA = 1)

f)      
Using prices as a guide, who will export what?  Explain.

g)     
What range must manufacturing prices be in to get free trade equilibrium?  Explain.

h)    
Show that real wages in each country will rise in the free trade equilibrium.

3:         (10 points) Use your results from (1) and (2) in the following. 

a.     
Discuss the pattern of absolute advantages across the two countries. 

b.     
Is absolute advantage necessary for gains from trade? 

c.      
What can absolute advantage tell us the direction of trade?  Discuss.

d.     
Explain why real wages rise in each country when we move to free trade even if one country has an absolute disadvantage in both sectors (eg Question 1).

4.     
(10 points)

a.     
Does a rise in Foreign manufacturing productivity from 15 to 25 hurt Home?  Explain fully.  That is, from Home’s perspective, is the free trade outcome in (1) better than the free trade outcome in (2).  Hint:  what is happening to world prices?

b.     
Does a rise in Foreign manufacturing productivity from 15 to 25 hurt Foreign? Show/discuss.

c.      
What does this imply about the impact of productivity growth in the developing world on developed nations? 

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