Question

The Ricardian Model I Consider two countries, Brazil and Italy and two goods, bananas and apples. In Brazil the number of working hours necessary to produce one kilo of apples and bananas is respectively equal to 3 and 2. In Italy the number of working hours necessary to produce one kilo of apples and bananas is instead equal to respectively 5 and 1. The labor supply in Brazil is equal to 1200 workers, while in Italy it is equal to 800 workers. Please answer the following questions:

1. (a) Show graphically the production possibility frontier for Brazil and Italy. What are the equilibrium prices under autarky in Brazil and in Italy? Why?

2. (b) Derive the world relative supply of the two goods (assume that the world is made up of only Brazil and Italy).

3. (c) Suppose that the relative world demand curve for the two goods is as follows:

   QDApples = PBananas (1)QDBananas PApples

   Graph in a diagram the relative world demand and the relative world supply and show the equilibrium relative price of apples and bananas prevailing under free trade.

4. (d) Describe the trade patterns between the two countries. Show that trade increases the social welfare of both Brazil and Italy.

5. (e) Assume now that Brazil has 2400 workers. Compute the new equilibrium price for apples. What can you conclude as far as the gains from trade for Brazil and Italy?

Answer 1

Page No Date: aL aib and italy poducs banass Mn 2. b bamanaPA