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In order to conjecture the circumstances in these two countries under autarky (when there is no trade), consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Argentina and El Salvador) are the only two countries in the world, at least for purposes of trade. There are two goods: Hammers and Widgets. Consumers in both countries always spend half of their income on Hammers and half of their income on Widgets. The only factor of production is labour. Each Argentinian worker can produce 4 Hammers or 2 Widget per unit of time. Each El Salvadoran worker can produce 2 Hammers or 2 Widgets per unit of time. There are 50 workers in Argentina and 75 workers in El Salvador. You need to provide conditions in each country by stating:
a) Derive the relative demand curve relating the relative demand for Widgets to the relative price of Widgets. Algebraically, show what the curve looks like in a diagram (put the relative price of Widgets on the vertical axis and the relative quantity of Widgets demanded on the horizontal axis).
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