Question

3. Assume that two countries, Home and Foreign, produce two goods: TVs and cars. Use the information below to answer the following questions: In the No-Trade equilibrium: Home Foreign TV sector Car sector TV sector Car sector Wage = 12 Wage = ? Wage* = ? Wage* = 6 MPL = 4 MPL = ? MPL* = ? MPL* = 1 Price = ? Price = 4 P* = 3 P* = ? (Hint: remember the link between price ratios and slope of the PPF curve) a. What is the marginal product of labor for cars in Home? What is the no- trade relative price of TVs in Home? b. What is the marginal product of labor for TVs in Foreign? What is the no-trade relative price of TVs in Foreign? c. Suppose the world relative price of TVs in the trade equilibrium is PTV/PC = 1/2. Which good will each country export? Briefly explain why. d. In the trade equilibrium, what is the real wage in Home in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in the no-trade equilibrium? e. In the trade equilibrium, what is the real wage in Foreign in terms of TVs and in terms of cars? How do these values compare with the real wage in terms of either good in the no-trade equilibrium? f. In the trade equilibrium, do Foreign workers earn more or less than Home’s workers, measured in terms of their ability to purchase goods? Explain why

Home		Foreign
TV sector	Car sector	TV sector	Car sector
Wage = 12	Wage = ?	Wage* = ?	Wage* = 6
MPL = 4	MPL = ?	MPL* = ?	MPL* = 1
Price = ?	Price = 4	P* = 3	P* = ?

Are my answers correct?

3a) MPLc =wage tv/Pc =12/4=3

      MPLtv =4

     Ptv/Pc =MPLc/MPLtv=3/4

3b) MPLc= 1 MPLtv= wage/Ptv =6/3=2

           TV/Pc= MPLc/MPLtv= 1 /2 =0.5

3c) The Home country will import “cars” and export “TV’s”, because price for cars

is cheaper in world market, =1/2 < ¾. Foreign will export cars, and import TV’s., since p=1/2 = ½, because the cost for importing TV’s is the same as it would be on the market.

3d) Home exports tv, so home is paid in TV’s

   Home wages with trade 1.5/4 = 0.375 units of cars or 4 units of tv

     Home wages without trade (¾) (4) = 3 units of cars or MPLtv 4 units of tv

3e) Foreign country paid in cars, because they export cars.

    Foreign wages with trade MPLc=1 car or

    (Pc/tv) *MPLc= .5*1 =0.5 unit of tv  

Foreign wages without trade MPLc= 1 unit of car or (1) (0.5) = 0.5 units of tv

3f) Home workers earn less than foreign in terms of cars because foreign has an absolute advantage in the production of cars.

Answer 1