Consider a two-country Ricardian trade model with 3000 hours of labour in NZ and 500 hours of labour in UK. They can each produce two goods, Cheese and Cars. In NZ, 25 hours of labour is required to produce 1 kilogram of Cheese, while 2000 hours are required to produce a Car. In UK, a Car requires 50 hours of labour to produce while a kilogram of Cheese takes 25 hours of labour to produce.
a) Graph the PPF (Production possibility frontier) for both NZ and UK, stating all assumptions that help determine the shape of the PPF.
b) Does NZ have an absolute advantage in production of any good? Explain.
c) What would be the relative supply of Cars in the world market, if both NZ and UK were to produce these two goods on the basis of their comparative advantage in production?
d) Assuming that the equilibrium relative price of Cars is equal to 10 in the world market, graph the equilibrium relative price, demand and supply of cars in this model. State all assumptions that help determine the shape of the relative supply curve for cars.