Question

Consider a Ricardian environment. Two countries (A and B) make two goods (X and Y). Country A has 60 units of labor and country B has 120 units of labor. The unit labor requirements are as follows:

	X	Y
Country A	1	2
Country B	2	3

a. Draw the PPF for each country

b. Calculate the autarky prices for each country (Px/Py)

c. Which country has an absolute advantage in good X? Good Y? Which has a comparative advantage in good X? Good Y? Please show your work.

d. What are the autarky wages of workers in country A, in units of good X per unit of labor? In units of good Y per unit of labor? What are the autarky wages of workers in country B, also in units of good X and in units of good Y? Can you tell which country’s workers are better off in autarky?

e. Suppose now that free trade between these countries leads to a world equilibrium price of px/py = 0.60. Explain the pattern of trade between A and B. Calculate the new wages of labor in each country in units of both X and Y. Are these workers better off, worse off, the same, or is it impossible to tell?

Answer 1