Question

Consider the following Ricardian model.

MPL                           Labor Supply

Pens           Pencils

       France         1/10              1/15                     90

       Germany     1/12              1/20                     120

Answer the following questions and show your steps. For the T/F questions, please explain why they are T/F.

assume that under free trade, the relative price of pens equals 0.65; i.e. P_pens^T/P_pencils^T = 0.65.

11. Draw the CPF for France, and label your picture. You can draw a new picture, or in the same picture as 1 above. What is the slope of CPF? (4 points)

12. Under free trade, the relative wage of France to Germany (w^FRANCE/w^GERMANY) equals 16/13.

13. Under free trade, the real wage for pencils in Germany equals 13/400.

14. Under free trade, the real wage for pencils in France equals 1/15.

Answer 1

It is given that France and Germany has the marginal productivity of labor 1/10 , 1/12 for pens and 1/15 ,1/20 for pencils respectively. The labor supply is 90 in France and 100 in Germany. Therefore in a 'without-trade' situation given the endowment of labor supply, France can produce 9 pens and 6 pencils, while Germany can produce 10 pens and 6 pencils.
Therefore what we can say is that
We mention France and Germany as A and B and Pens (X) and Pencils (Y) here onward.

Country      
(Unit Labor Requirement)   Pens (X)   Pencils(Y)
France (A)   10   15
Germany(B)   12   20
The autarky relative prices of good X, px/py
Country A: PX/PY=15/10=1.5
Country B: PX/PY=20/12=1.66
Now Autarky wages in units of the goods are just the reciprocals of the respective unit labor requirements:

For CountryA:
w/pX (in units of X) = 0.1
w/pY (in units of Y) = 0.06

For Country B:
w/pX (in units of X) = 0.083
w/pY (in units of Y) = 0.05

A’s workers are better off because they can consume more of both goods.
Now it is given that free trade between these countries leads to a world equilibrium price of px/py = 0.65
Then In units of the good they don’t produce, wages depend on the price ratio, as
follows
A: wA/pY = (wA/pX )(pX/pY) = (0.1)(0.65) = 0.065=1/15 ....................(i)
B: wB/pX = (wB/pY )/(pX/pY) = (0.06)/(0.65) = 0.092397...................(ii)

Thus from (i) we can say that statement 14 is true, but statement 13 is false.