Suppose that each worker in Home can produce two cars or three TVS. Assume that Home...

Suppose that each worker in Home can produce two cars or three TVS. Assume that Home has four workers.

6) Now suppose the world relative price of cars is Pc/Ptv = 1.

a) In what good will each country specialize? Briefly explain why.

b) Graph the new world price line for each country in the figures in Problem 5 and add a new indifference curve (U2) for each country in the trade equilibrium.

c) Label the exports and imports for each country. How does the amount of Home exports compare with Foreign imports?

d) Does each country gain from trade? Briefly explain why or why not.

Expert Solution

a)

Since opportunity cost of producing TV in the home country is less than the opportunity cost of producing TV in foreign. Therefore, Home has a comparative advantage in the production of TVs. So, Home will specialize in the production of TV and exports TV and import cars

Similarly, Since, the opportunity cost of producing Cars in a foreign country is less than the opportunity cost of producing Cars in home country. Therefore, Foreign has a comparative advantage in the production of Cars. So, Foreign will specialize in the production of Cars and export cars and import TV.

b)

c)

In the Ricardian Model, we have balanced trade. Amount of Home TV Exports = Amount of Foreign TV Imports

Amount of Home Cars Imports = Amount of Foreign cars exports

d)

Since, both the countries have their consumption bundles of TV and Cars on higher Indifference curves, so they will benefit from trade vis-a-vis the no-trade condition

Rahul Sunny answered 3 weeks ago

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