Question

Consider the following model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: Corn and Radio. Consumers always spend one-third of their income on Corn and the remainder on Radios. The only factor of production is labour. Each home country worker can produce 2 units of Corn or 3 units of Radios per unit of time, while each foreign worker can produce 2 units of Corn or 4 units of Radios per unit of time. There are 30 workers in Home and 60 workers in Foreign.

(a) Which country has an absolute advantage in Radios? In Corn?

(b) Which country has a comparative advantage in Radios? In Corn?

(c) Draw the typical worker’s budget line in both countries (put Corn on the vertical axis and Radios on the horizontal axis).

(d) Draw the production possibility frontier for each country (put Corn on the vertical axis and Radios on the horizontal axis).

(e) Find the autarky relative price of Radios in both countries (i.e., the price of Radio divided by the price of Corn).

(f) What is the optimal consumption and production for each country under autarky?

Answer 1