Question

There are 2 countries, Home and Foreign, and 2 goods, Wine and Cheese. In each country
the are 150 workers. But not all workers are the same: some workers are cheese-makers and some
workers are wine-makers. Each cheese-maker can produce one pound of cheese and zero bottles of
wine, and each wine-maker can produce one bottle of wine and zero pounds of cheese. In the Home
country there are 100 cheese-makers and 50 wine-makers, and in the Foreign country there are 50
cheese-makers and 100 wine-makers. The relative demand for Cheese of each individual worker is
RD =
Cc/Cw
=
1/ (Pc/Pw)
.

1. Suppose that both countries are closed to international trade, but cheese-makers and wine-
makers can trade with one another within each country. What is the price of cheese (in terms

of wine) in each country?
2. Are both Cheese-makers and Wine-makers better off under free trade than under international
autarky in the Home country?

Answer 1

Answer 1)

Workers	Home	Foreign
Wine	50=50 bottles	100=100 bottles
Cheese	100=100 pounds	50=50 Pounds

Home Country:

Price of Cheese =50/100= 0.5 Wine

Price of Wine =100/50= 2 Cheese

Foreign Country

Price of Cheese = 100/50=2 Wine

Price of Wine=50/100=0.5 Cheese

Answer 2)

As per above table workers for cheese maker are more in home country than that of Foreign Country hence Home country has absolute advantage for Cheese production on the other hand Foreign country has absolute advantage for Wine production as number of wine makers are more compared to cheese makers

Also Opportunity cost of cheese production of Home country is lesser than of Foreign Country hence it also has comparative advantage in cheese production and also Foreign country has less cost in wine production compared to cheese production so has comparative advantage in Wine production over home country.

Hence if free trade exists Home country is better off in cheese production and Foreign country better off in Wine Production