Assume that Home and Foreign produce 2 goods, TVs and cars, and use the information below to answer the following questions.
In the No-Trade Equilibrium
Home Country Foreign Country
WageTV = 12 WageC = ? Wage*TV = 12 Wage*C = ?
MPLTV = 2 MPLC = ? MPL*TV = 2 MPL*C = ?
PTV = ? PC =4 P*TV = ? P*C =4
a. What is the marginal product of labor for TVs and cars in the Home country? What is the no-trade relative price of TVs at Home?
b. What is the marginal product of labor for TVs and cars in the Foreign country? What is the no-trade relative price of TVs in Foreign?
c. Suppose the world relative price of TVs in the trade equilibrium is PTV/PC = 1. Which good will each country export? Briefly explain why.
d. In the trade equilibrium, what is the real wage at Home in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in the no-trade equilibrium?
e. In the trade equilibrium, what is the real wage in Foreign in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in the no-trade equilibrium?
f. In the trade equilibrium, do Foreign workers earn more or less than those at Home, measured in terms of their ability to purchase goods? Explain why.