Question

3. Consider two Ricardian economies whose endowments and technologies are given in the table below. Each has fixed endowment of labour, only factor of production, and can produce two goods, cloth C and food F, using the constant amounts of labour per unit of output.

Per Unit Labour Requirement Labour Endowment C F 60 2 120 Country A Country B 1 2 3

Suppose now that free trade between the two countries leads to a world equilibrium price of PC/PF = 0.60. Calculate the new wages of labour in each country in units of both C and F. Are these workers better off?

Answer 1

Answer :- wages depend on price ratio :-

For country A, (new wages) :

(i) in units of C , it is 1.0

(ii) in units of F, it is 0.60

For Country B, (new wages) :

(i) in units of C, it is0. 55

(ii) in units of F, it is 0.33

A and B both worker's are better off.

Solution & Explanation :-

Diagram &hows the product possiblity frontiers of Country A&B- F F 401 30 60 C 60 C Now, autorky sielative prices of good C, Pel 30 60 = 0.50 autoucky PelPF autorky Pelo 40 0.67 60 W Pe (in units = 1.0 PE for Country A : for Country B : loto, Autorky wages in units of the goods (It is just the deciprocal of the srespective unit bebor requirements for Country A: of C) :wo (in units of F) = 0.5 For Courtsy B : W (cin units of C) = 0.5 Pc 16. (in writs of F) = 0.33 Nows, in this question, it is geiven that ; in free trade Pe/PE = 0.60 Now, in units of good they still produce , some wages as in autorky : for Country A: WA Pe for Country B : wo 1 PE 1 = 0.33 De 9 - 1 OLE = 1 1.0 = ; OLF

Now, win units of good they don't produce , wages depend on the price ratio às gaiven below : for Country A » WA PE QUA Pc * 1.0 X 0.60 PE * WA = 0.60 for Country B » PE w Pc Pc PE Corey 0-53/0-60 w Pc » W8 = 0.55 Pc Now, A's workers are better off because they can buy the idame amount of C (1.0) and more F (0.60) and Bºš worker's are also better off because they can buy the same amount of F(0.33) and more C (0.55)