Reference no: EM133131569

In order to conjecture the circumstances in these two countries under free trade, consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Home and Foreign) are the only two countries in the world, at least for purposes of trade. There are two goods: computers and cloths. Consumers in both countries always spend half of their income on computers and half of their income on cloths. The only factor of production is labour.

Each home country worker can produce 4 computers or 2 cloths per unit of time. Each foreign country worker can produce 2 computers or 3 cloths per unit of time. There are 100 workers in Home and 80 workers in Foreign.

a) Derive the world relative demand curve relating the relative demand for computers to the relative price of computers. Algebraically, and then show what the curve looks like in a diagram (put the relative price of computers on the vertical axis and the relative quantity of computers demanded on the horizontal axis).