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Consider the two fictional nations of Sapello and Pojoaque. Your job is to analyze the potential...

Consider the two fictional nations of Sapello and Pojoaque. Your job is to analyze the potential for trade between the two nations. Throughout this analysis all 12 assumptions from the book will hold, unless specifically stated otherwise. Further assume that both nations are part of a monetary union and use the same currency, corporals ©. This means we do not need to consider an exchange rate.

1. (4 points)

1.a.         Given the table below identify the absolute and comparative advantages for each nation (note: the table below lists hours of labor required to produce a unit of wine/chilis).

Hours of Labor Required to Produce Wine and Chilis

Sapello

Pojoaque

Wine

12

5

Chili

3

10

1.b.        Suppose that Sapello has 10,000 hours of labor and that Pojoaque has 12,000 hours of labor to divide between the wine and chili production. In the space below, graph the production possibilities frontier (PPF) for each country. The graph does not need to be to scale, but you must label the maximum levels of production for wine and chilis.

1.c. In the space below list the range of possible terms of trade (aka trade prices) for wine and chilis.

1.d.        In the space below compute the range of relative wage ratios for the two countries.

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