Question

Question 1 Use the 2-country Ricardian model with free trade (graphically, using standard graphs) to work out the effects of the following changes (one at a time) on the Home and Foreign terms of trade and welfare. Assume that two goods, Food and Cloth, are produced and consumed, Home country has a comparative advantage in Food, and that in the initial equilibrium, both countries specialize completely. Assume that preferences are identical and homothetic in the two countries. (a) A decrease of unit labour requirement for cloth at Home (please note all possibilities); (b) A decrease of the same percentage in both countries, in the unit labour requirements for producing food.

Answer 1

classmate Dote Classical Theory: - o 10 carda 41 or ulo 20 of a produced X and B produced y both tradle Twith each ottier so they both benefit Соціlу делац I relative advant age of producing - u connoolitus so it exports/- and they utpost Goody group I coufitry B. England & frutgal- They produce same commodity AT wine & cloths Labour is the only factor of produ- All units of Callout Londgeneous- brice of a commodities are determine a by labeur Cost v en have of Constant return Classical X+B=H L =

England Wene 3 - Portugal to > X - cloth. portugal is producing cloth ie o B' of England is producing same ic of Therefore then portugal produces wine because no. of labour hours is less. Therefore I both the countries benefht of portugal is produang wire ie OB I the same thing is produced by England deon. Therefore labour houts fol producing wine is more for England. Then, it will produce cloth 2