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Problem 1. (10 points.) This problem is based on the Ricardian Model. Assume that 2 countries, Gryffindor and Slytherin, use troll labor to produce 2 goods, swords and brooms. (a) In Gryffindor, 1 troll can produce 2 swords or 4 brooms, while in Slytherin the production of 1 sword requires 5 trolls and the production of 1 broom requires 2 trolls. Assume that there are 100 trolls in each country. Draw a PPF for each country. (b) Which country has a comparative advantage in swords and why? (c) Suppose that in the trade equilibrium Ps/PB 2.3. Which good will each country export? (d) For each country, calculate the real wage in terms of swords and in terms of brooms. (e) For each country, compare the values you obtained in part (d) with the real wage in terms of either good in the no-trade equilibrium. Do trolls in each country gain from trade? (f How much will the trolls of each country consume under autarky and if there is trade?

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1) Enclosed graph

2) In the Ricardian model depend the patterns in trade depends on the comparative advantage. As in the enclosed graph the opportunity cost of swords

1) Enclosed graph 2) In the Ricardian model depend the patterms in trade depends on the comparative advantage. As in the enclosed graph the opportunity cost of swords (the PPF slope above that is equal to MPLs/MPLB 2) in Gryffindor is smaller compared to slytherin (MPL*sMPL*B = 2.5), thus indicates that Gryffindor has a comparative advantage in production of swords, and Slytherin has a comparative advantage in production of brooms. 400 Gryffindor 3) In the Ricardian model depend the patterns in trade depends on the comparative advantage, thus Gryffindor will export swords and Slytherin will export brooms. We have done the computations abobe in Part-2 4) Gryffindor has a comparative advantage in production of swords, thus will produce only swords, thus the wage in terms of swords is its MPLs 2. 200 Quantity of swords To know its wage in terms of brooms, we have to calculate how many brooms Gryffindor troll can buy with the given income: 50 Gryffindor Wage (in terms of brooms)- w/Pb Slytherin -(Ps/PB) x MPLs -2.3 x 2 PPF In a similar approach, Slytherin, Wage (in terms of brooms)- MPL*B-0.5 2.5 Quantity of swords Slytherin, Wage (in terms of swords)- wP;s (1/2.3) x 0.5 = 0.22 5) In each nation, when there is no-trade equilibrium, the wages in terms of swords and brooms will be equal to marginal products of labor in the corresponding sector. Thus the wage in Gryffindor in terms of swords will be 2 and in terms of brooms will be 4, thus trolls there gain from trade, because as we computed in above in Part-4 in the trade equilibrium their real wage equals 2 swords and 4.6 brooms. In similar approach, when in Slytherin there is no-trade, the equilibrium wage in terms of swords is equals 1/5 - 0.2 and in terms of brooms is 1/2- 0.5, thus trolls there gain from trade, because in the trade equilibriunm their real wage is 0.22 swords and 0.5 brooms as we computed in above in Part-4

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