RICARDIAN MODEL. Similarly, World demand curve is between relative price and relative quantity: Q=12/(10P)

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Sheila McLaughlin
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1 SOLUTIONS- ASSIGNMENT 1 RICARDIAN MODEL Part A : Home Production Possibility Frontier: 1 Q c +2 Q w =120 Foreign Production Possibility Frontier: 6 Q* c +3 Q* w =60 World supply curve is between relative price and relative quantity-p=p c/pw and Q=Q c/q w The supply is a step function- the graph becomes vertical at Q c/q w =6, Which, is given by = Q c/q* w = 120/20=6 (please see class notes or the krugman text) Similarly, World demand curve is between relative price and relative quantity: Q=12/(10P) Relative P Relative Q (demand) Intersection between the world demand and world supply gives us the point of equilibrium. -World relative price is P=1/2; World relative quantity= 2.4

2 Complete Specialization in the Foreign Country Q* w = 20 units of wine.(l*/a* LC)= (60/3) There is incomplete specialization in the home country - We know that Q c+q* c/q w+q* w=2.4 Since Foreign country specializes in the production of Wine : Q* w=20 and Q* c=0 Q c/q w+20=2.4 Q c=2.4(q w+20) = Equation (2.1) If you reached up to this point you get the complete score. ****************************************************************************** You can take this point further and actually solve the above equation for that you need more information and that would come from the equation for the Production possibility frontier. 1 Q c +2 Q w = Equation (2.2) Substitute Q c from equation 2.1 into the above equation 2.2. You get : 2.4Q w Q w = Q w =120 48=72 Q w=72/4.4= units of wine Q c=87.27 units of cheese Part B: 120; 240 Home Production Possibility Frontier: 1 Q c +2 Q w =120 Foreign Production Possibility Frontier: 6 Q* c +3 Q* w =720 Cheese 120 Home Foreign Wine

3 World supply curve is between relative price and relative quantity-p=p c/pw and Q=Q c/q w The supply is a step function- the graph becomes vertical at Q c/q w =1/2, Which, is given by = Q c/q* w = 120/240=0.5 (please see class notes or the krugman text) Similarly, World demand curve is drawn between relative price and relative quantity: Q=12/(10P) Relative P Relative Q (demand) World relative price is P=2; World relative quantity= 0.6 Complete Specialization in the Home Country Q c = 120 units of cheese. (L/a LC)= (120/1) There is incomplete specialization in the foreign country - We know that Q c+q* c/q w+q* w=0.6 Home Country Q c = 120 units of cheese Q w= Q* c/q* w = 0.6 If you reached up to this point you get the complete score. You can substitute this above equation in the Production possibility frontier for the foreign country and solve further.

4 SPECIFIC FACTOR MODEL 1), if we have food(land specific) and manufacture (capital specific). After opening up to trade P m/ P f falls or P f/ P m rises 2) Nominal wage (W) increases in Mexico. In order to draw the graph you can assume that only P f changes (rise) and P m stays constant such that P m/ P f falls. 3) The change in the real wage is ambiguous: Nominal wage increases less than P f - thus, real wage in terms of price of food (W/ P f ) falls. Real wages in terms of price of manufacture (W/ P m ) would rise. whether a worker is better off or worse off depends on his or her relative consumption of the two goods. If the worker consumes more proportion of land goods, it is more likely that real wage drops. 4) Land owners better off in Mexico, because a rise in P f which isn t matched by the same increase in W implies that a larger share of the output is left for the landowners.

5 THE WORLD WE LIVE IN The World trade has increased many folds over the last 50 years. There is an upward trend in all the sectors. However, the growth in trade of manufactures has been much more than the growth in trade of agricultural goods. Source: Chapter 1 of Global Economy text 40% of trade in North America is within the region and 22% with other Asian countries Latin American countries trade more with North American countries (57.8%) Everything but Arms Initiative EBA" - Everything But Arms initiative: Special Arrangements for Least Developed Countries "EBA Regulation" ("Everything But Arms") was adapted in EBA provides the most favourable regime available. The EBA gives the 50 LDC countries duty free access to the EU markets for all products, except arms and ammunition

6 Source: Preferential Trade Agreements or Free Trade Agreement FREE TRADE AGREEMENTS Agreement Partners and Link to Detail "In Force" Date / Status North American Free Trade Agreement (NAFTA) 01-Jan-1994 Canada - U.S. Free Trade Agreement (CUSFTA) *NOW NAFTA 12-Oct-1987 (SUPERSEDED BY NAFTA, WHICH INCLUDES MEXICO) Canada - Colombia Free Trade Agreement Signed 21-Nov-2008 Canada - Peru Free Trade Agreement Signed 29-May-2008 Canada - European Free Trade Association (EFTA) Signed 26-Jan-2008 Canada - Costa Rica Free Trade Agreement (CCRFTA) 01-Nov-2002 Canada - Chile Free Trade Agreement (CCFTA) 05-Jul-1997 Canada - Israel Free Trade Agreement (CIFTA) 01-Jan-1997 Source: Canada and GATT Canada and 22 other nations signed the General Agreement on Tariffs and Trade on 20 October The agreement came into effect on 1 January Source:

Introduction. Countries engage in international trade for two basic reasons:

Introduction. Countries engage in international trade for two basic reasons: Introduction Countries engage in international trade for two basic reasons: They are different from each other in terms of climate, land, capital, labor, and technology. They try to achieve scale economies