Question

Consider a world with two countries, Home and Foreign. Assume there are only two products (industries) in the world, Wine and Cloth. The table below lists the productivity of each industry in the two countries. Home has 900 units of labour, and Foreign has 900 units labour as well.

Units of Output per Labour

	Wine	Cloth
Home Foreign	4 2	4 5

The complete long question contains the following questions.

1. Suppose without trade, Home produces 2000 units of Wine. What does Home consumes? If the price of Wine in the country is $1, what is the price of Cloth and what is the wage rate?
2. Suppose Home and Foreign trade with each other based on comparative advantage. Suppose they trade 2000 units of Wine for 2500 units of Cloth.
a. What does Home produce with trade? What does Home consume with trade?
b. What is the relative price (Wine to Cloth) in trade?
c. Suppose Home wage rate is $6 with free trade. What is Foreign wage rate in trade?

Question 12 (4 points)

Suppose without trade, 2000 units of Wine are produced in Home. This means Home consumes

_____units of Wine and_____units of Cloth without trade. If in the country, the price of Wine, P_W, is $1, the price of Cloth,P_C, is $____

and the wage rate, w, is $ ____

Question 13 (2 points)

With trade, Home completely specializes in its comparative advantage. With trade, the country produces _____units of Wine and _____units of Cloth.

Question 14 (2 points)

With trade, Home exports (Wine, Cloth)_____and imports (Wine, Cloth)______

Question 15 (1 point)

Suppose when the countries trade with each other, the terms of the exchange is 2000 units of Wine for 2500 units of Cloth. The relative price in trade, P_W/ P_C , is _____(Please use the terms of the exchange for all following questions.)

Question 16 (2 points)

With trade, Home consumes_____units of Wine and ____units of Cloth.

Question 17 (1 point)

Suppose with free trade, the wage rate in Home, w, is $6. We can calculate the wage rate in Foreign, w’, by calculating the variables in the following order:

Question 17 options:

a	Price of Wine, Price of Cloth, Foreign wage rate
b	Foreign wage rate directly, nothing else.
c	Relative price of Wine to Cloth in Home, Relative price of Wine to Cloth in Foreign, Foreign wage rate
d	There is not enough information to calculate the Foreign wage rate.
e	Price of Cloth, Price of Wine, Foreign wage rate

Calculate all the variables needed in the previous question. Please note that the variables may not listed in correct order (so you should not use this question as a hint to the previous question.) Write down “0” in the cell if you do not need it, even if you can calculate it out. For example, if your answer to the previous question includes three variables, you should have two "0"s in the blanks below.

Question 18 (1 point)

Price of Cloth is $_____

Question 19 (1 point)

Price of Wine is $_____

Question 20 (1 point)

Relative price of Wine to Cloth in Home is____

Question 21 (1 point)

Foreign wage rate is $_____

Question 22 (1 point)

Relative price of Wine to Cloth in Foreign is_____

Answer 1

Question 1:

units of wine produced by home = 2000

units of output of wine per unit of labour = 4

therefore labour used in producing 2000 units of wine = 2000 divided by 4 = 5000

therefore labour left for production of cloth = 400

units of output of cloth produced per unit of labour = 4

therefore unit of clothes produced = 4 multiplied by 400 = 1600

thus means if home produces 2000 units of wine it consumes 1600 units of clothes.

price of cloth is 1600$
And wage rate = number of output multiplied by price = 4*1= 4$ per unit of labour

Question no. 2

a) if we analyse comparative advantages then Home will produce wine and will consume clothes as it will be more profitable to produce wine.

b) the comparative rate of wine: rate of clothes is 2:1.
c) there not enough information to calculate wage rate.

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