Reference no: EM132498072

Assume that the world consists of Norway and Sweden and that these countries do not trade with each other. There are two goods in this world, timber and mobile phones. Assume that Sweden needs 1 worker to produce a unit of timber and 2 workers to produce a mobile phone. Norway needs 6 workers to produce a unit of timber and 3 workers to produce a mobile phone. We assume for simplicity that both countries have 24 workers each. Use the Ricardian model to answer the following questions.

a) Draw the Production Possibility Frontiers for timber and mobile phones in both countries.

b) Assume that both countries produce both goods in autarky. What will the autarky prices be in the two countries?

c) Now we allow the countries to trade with each other. Assume that the equilibrium with trade is such that one country fully specialises in the production of timber and the other country in mobile phones. Which country specialises in which good?

d) Give one potential global relative price that would generate full specialisation in both countries.

e) How can it be that a country that is less productive at producing all goods can still benefit from trade?