Draw diagram which shows home country equilibrium with trade

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Reference no: EM133659729

Problem

Suppose Home and Foreign countries (H and F) trade two goods, G1 and G2, and each country is populated with 2 workers (workers can split work time between two industries). At home, one worker can produce either 1 units of G1 or 2 units of G2 in one day. For foreign worker it takes 0.5 days to produce one unit of G1 and 0.2 days to produce one unit of G2.

1. Calculate the opportunity costs of producing G1 in each country.

2. Draw a diagram which shows Home country equilibrium with and without trade (production, consumption, relative price, and trade áows). Illustrate gains from trade in this diagram.

3. Calculate real wage in the Home country before and after trade if free trade relative price of G1 is 2.5.

4. Calculate the world relative supply of G1 at the relative price p1 = 2:2

Reference no: EM133659729

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