Reference no: EM133710477

Question: Consider two countries, Home and Foreign, which are closed to international trade.  Home has LH=1,070 units of labor available, and Foreign has LF=(1,070)/(0.5) units of labor.  Both countries can produce two goods, good 1 and good 2.  Home's unit labor requirement in good 1 production is 1, while in good 2 production is 10.  Foreign's unit labor requirement in good 1 production is 10, while in good 2 production it is 1.  

Assume that both countries trade with each other and  that the world relative demand (RD) takes the following form: (Demand for good 1)/(Demand for good 2) = (11)/[(Price of good 1)/(Price of good 2)].

1. Assume that the two countries cannot trade.  Compute the equilibrium price of good 1 in terms of good 2 at Home and Foreign, assuming that consumers in each country like to consume both goods. Explain how you determined this equilibrium price.
2. Assume now that the two countries open to trade with each other. Construct the world relative supply curve. Show it in a graph. Explain how the RS curve is constructed.
3. Plot the provided relative demand curve in the graph in b) and compute the equilibrium relative price of good 1 under free trade.  Show it in the graph. Enter this price in the answer box, using two decimal digits.
4. Indicate the good/s that each country is producing in the free trade equilibrium. Explain how you determined this pattern of production.
5. Indicate the good/s that each country is exporting in the free trade equilibrium.