Question: Now suppose the world relative price of cars is PC /PTV = 1.
a. In what good will each country specialize? Briefly explain why.
b. Graph the new world price line for each country in the figures in Problem III, and add a new indifference curve (U2) for each country in the trade equilibrium.
c. Label the exports and imports for each country. How does the amount of Home exports compare with Foreign imports?
d. Does each country gain from trade? Briefly explain why or why not.
Problem III: Suppose that in the absence of trade, Home consumes nine cars and two TVs, while Foreign consumes two cars and nine TVs. Add the indifference curve for each country to the figures in Problems I and II. Label the production possibilities frontier (PPF), indifference curve (U1), and the no-trade equilibrium consumption and production for each country.
Problems II: Suppose that each worker in the Foreign country can produce two cars or three TVs. Assume that Foreign also has four workers.
a. Graph the production possibilities frontier for the Foreign country.
b. What is the no-trade relative price of cars in Foreign?
c. Using the information provided in Problem I regarding Home, in which good does Foreign have a comparative advantage, and why?
Problem I: Suppose that each worker in the Home country can produce three cars or two TVs. Assume that Home has four workers.
a. Graph the production possibilities frontier for the Home country.
b. What is the no-trade relative price of cars at Home?