Draw the world relative supply curve rs for good x

Reference no: EM13151625

1. Consider two countries: A and B. Labour is the only factor of production for goods X and Y.

Consider the following matrix of unit labour requirements.

	X	Y	Labor Endowments
Country A	a_Lx = 15	a_Ly= 3	120
Country B	a_Lx^* = 6	a_Ly^*= 2	120

a) Which country has comparative advantage and absolute advantage in producing good X?

b) What is the autarky relative price of good X for country A? For country B?

c) Draw the world relative supply curve RS for good X. Label all the axes (relative price of good X on the vertical axis and world output of x relative to y on the horizontal axis) and the relevant points.

d) Suppose that the relative demand RD for good X is given by:

(P_x/P_y) = 10 - 12 * ( ( Q_x +Q*_x) / (Q_y + Q*_y) ).

With free trade: (i) What will be the equilibrium world relative price of good X be equal to? (ii) Calculate the equilibrium wage rate w in A relative to that in B under free trade: w/w*.

2. If the world price of oil falls, what impact will this have on the welfare of an oil exporting country like Saudi Arabia? Use the Ricardian trade model assuming that Saudi Arabia is specialized in the production of oil and imports another good called "Manufactures" to answer this. You can ignore the Foreign Country and just focus on Saudi Arabia.

3. True or false? Briefly explain. "Free trade is beneficial because it rotates a country's production possibility frontier (PPF) outward."

4. In class we worked through the trade example where Home had a comparative advantage in cheese (a_lc /a_lw < a_lc* /a_lw*). The result was that world price ratio was between the autarky price ratios of the two countries. We showed for the Home country that the opening of trade resulted in the workers' real wage in terms of cheese remaining the same while the real wage in terms of wine increased.

(a) With the opening of trade what will the nominal wage W* be in the Foreign country? (You will not be able to find a numerical value here.) Briefly explain.

(b) What will happen with the opening of trade to the Foreign country's real wage in terms of cheese and wine? Briefly explain.

5. Draw the production possibility frontier for the Home country with cloth on the horizontal axis and food on the vertical axis. Suppose the economy is engaged in free trade and the free trade relative price of cloth is given.

(a) In your PPF diagram show where the economy will produce. What condition holds at that point? (Note: Do not illustrate the consumption point - just where production takes place.)

(b) Now suppose the economy's endowment of capital - the specific factor used to produce cloth - increases. In your PPF diagram, show the economy's new production possibility frontier. Briefly justify your answer.

(c) If the free trade relative price of cloth remains constant, illustrate in your diagram where production will now take place. Will production of cloth increase or decrease?

Reference no: EM13151625

Questions Cloud

Capital markets research in accounting. : an application question which is about "capital markets research" in accounting. "Marcus Padley, a stockbroker, made the following statements in an article in The Sydney Morning Herald.

Explain how the fed use of its three tools of monetary : Explain how the Fed's use of its three tools of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate.

Probability of emergency program at the end of next year : An emergency program set up by the state. approximate the probability that the intersection in question will come under the emergency program at the end of the next year.

Residual value of a leased asset : If the residual value of a leased asset is greater than the amount guaranteed by the lessee, the lessee:

Draw the world relative supply curve rs for good x : Draw the world relative supply curve RS for good X. Label all the axes (relative price of good X on the vertical axis and world output of x relative to y on the horizontal axis) and the relevant points.

Explain how many minutes will it take for the quantity : Suppose we start with 0.0530 mol of N2O5 in a volume of 5.2 L. How many minutes will it take for the quantity of N2O5 to drop to 0.0253 mol?

Explain how the fed''s use of its three tools of monetary : Explain how the Fed's use of its three tools of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate.

Write the phenotypic designation for a mutation : write the genotypic designation for THREE DIFFERENT mutations in two genes coding for enzymes in proline biosynthesis. One mutation leads to the loss of the first dedicated enzyme in proline biosynthesis.

How many joules are required to raise the temperature : How many joules are required to raise the temperature of 80g of iron from 20 degrees celsius to 70 degrees celsius?

User Account

All Pages