Question

This question relates to the Ricardian Trade Model. Suppose costs of production depend only on labor costs, and that to produce a unit of each commodity in each country takes the number of labor hours shown.

Good	aLi	aLi*
Wheat	2	2
Soybeans	3	5
Cotton	2	4
Avocados	6	4
Percorino (Cheese)	12	3

a. Suppose the wage ratio, w/w* = 1.25. Which goods does the home country produce? Which goods does the foreign country produce? Explain clearly how you obtain your answer.

b. Draw a diagram showing relative wages (w/w*) in the vertical axis and relative labor (L/L*) on the horizontal axis. Draw the relative supply and demand curves which correspond to part a.

c. There is an increase in home labor supply L. Draw a new relative labor supply of labor such that avocados are produced by both countries. What relative wage (w/w*) is consistent with this?

Answer 1