Question: Consider two countries, Home and Foreign, and two goods, apples and bananas. In the home country the unit labor requirements for apples and bananas are, respectively. 3 and 2; in the foreign country the unit labor requirements for apples and bananas are, respectively, 5 and 1. Home has a labor force of 1200, and Foreign has a labor force of 800.
(a) Graph Home's and Foreign's production possibility frontier. What are the prices of apples in terms of bananas in both countries in the absence of trade? Why?
(b) Construct the world's relative supply curve.
(c) Suppose world relative demand takes the following form:
Quantity of bananas/quantity of apples price of apples/price of bananas
Graph the world relative demand along with the world's relative supply curve. What is the equilibrium relative price of apples under free trade? Give an exact number.
(d) Describe the pattern of trade: which country exports which good? Show that both Home and Foreign gain from trade. Use the diagrams in (a) to answer this question.
Suppose that instead of 1200 workers, Home has a labor force of 2400.
(e) Find the equilibrium relative price. Again, find an exact number.
(0 Do both countries still gain from trade? Explain your answer using similar diagrams as in (d).