Question

Suppose the following table shows the per unit labor requirements for country A and B for goods S (soybeans) and T (textiles).

    Country A       Country   B        

S          1/20                    1/4

T          1/10                     1/5    

1. What is the relative price of good S in country A?
2. What is the opportunity cost of making good T in country B?
3. When trade opens up, what will upper and lower ranges for the terms of trade (world relative prices) be?
4. Suppose the exchange rate between countries A and B equals 1. Which country will have higher wages and by how much (show at least and at most how high).

Answer 1

1) Relative price of good S in country A = Price of good S/ Price of good T

Relative price = (1/20) good S/(1/10) good T = (0.05)/(0.1)

Relative price = 0.5 S/ 1T

2) In autarky relative prices are equal to opportunity cost of production

Relative price of good T in country B = Price of good T/ Price of good S

Relative price = (1/5) good T /(1/4) good S

Relative price = 0.2 good T / 0.25 good S

Relative price = 2 good T/ 2.5 good S

Relative price in terms of good S = 2.5 good S/ 2 good T

3)

Upper and lower limits of trade

(Price of good S/ Price of good T) = (0.5/1,2.5/2)