Question
In: Economics
(30 marks) In a Ricardian model, there are two countries: Canada (CAN) and India (IND). Two...
- In a Ricardian model, there are two countries: Canada (CAN) and India (IND). Two goods are produced, each using only labour: games (g) and shoes (s). The unit labour requirements to produce these goods in each country are:
| aLGCAN=4 | aLG IND= 4 |
| aLsCAN =6 | aLGIND = 3 |
Each country has the following amounts of labour: .
- What are the comparative advantages of each country, if they have any? Explain why and show your work.
- Now assume that Canada and India open up to trade. Draw the relative supply curve of games and a relative demand curve that intersects it where the relative price of games is equal to 1. You should also label the relative price at each of the “steps” of the RS curve as well as the relative quantity at the vertical portion of the RS curve for full marks.
- Using the RS curve from the last part, what is the pattern of trade/specialization in both countries? Explain why.
- Illustrate the gains from trade for Canada when it opens up to trade with India, using a diagram containing the PPF.
- Calculate the relative wage of Canada, relative to India with trade. You may assume the price of games is 1.
- Suppose that the unit labour requirement for games in Canada,, decreased to 3. Explain how this would affect the gains from trade for Canada, assuming that the RD curve still intersects the new RS curve at a relative price of games of 1. Draw at least a diagram containing the PPF to show the new gains from trade.
Solutions
Rahul Sunny answered 1 year agoRelated Solutions
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