Problem
This question is from the International Economics course (mostly microeconomics material)
Consider a two-country, two-goods world. Trade is based on comparative advantage. You are given the following information (which applies to the whole question, unless otherwise stated): One labour can produce 2 computers (C) or 20 pairs of shoes (S) in Home (H);while one labour can produce 1 computer or 15 pairs of shoes in Foreign (F). Home has 250 labour while Foreign has 200 labour. The free-trade relative price of computer is a weighted average of the countries autarky relative price in which 60% of the weight is attached to Homes autarky price. Both countries agree to trade 110 units of computers.
a) Which country will import computers? Explain.
b) Find the production and consumption bundle for Home under free trade. Now, suppose Home experiences a technological improvement such that the productivity of shoes doubles.
c) What happens to the free-trade relative price of computers? Which country will export computers after the productivity improvement in shoes in Home? Explain.
d) In a well-labeled diagram (label computers on the horizontal axis), identify Homes levels of exports and imports before and after Homes productivity improvement in the production of shoes. No written explanation is needed. Be sure to label the slopes of the PPFs and budget constraints, and no need to include the indifference curves.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.