Assume that home can produce two goods

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Assume that Home can produce two goods, apples and bananas. The unit labor requirement in apple production is 4, while it is 2 in banana production. Foreign’s unit labor requirement for apples is 8 and it is 2 for bananas. Assume that when these countries trade, Home specializes in apples, Foreign specializes in bananas and the world relative price of apples (PA/PB) = 2.

a. If these countries trade, which country will have a higher wage? Why is this the case?

b. Using a numerical example for prices, show how wages are derived in each country when they trade with each other.

Reference no: EM131424595

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