Ricardian Model. Consider two countries: A and B. Labour is the only factor of production for goods X and Y. Consider the following matrix of unit labour requirements. X Y Labor Endowments Country A aLx = 15 aLy = 3 60 Country B aLx* = 6 aLy* = 2 60
a) Which country has comparative advantage and absolute advantage in producing good X?
b) What is the autarky relative price of good X for country A? For country B?
c) Draw the world relative supply curve RS for good X. Label all the axes (relative price of good X on the vertical axis and world output of x relative to y on the horizontal axis) and the relevant points.
d) Suppose that the relative demand RD for good X is given by: (Px/Py) = 10 – 12 * ( ( Qx +Q*x) / (Qy + Q*y) ). With free trade: (i) What will be the equilibrium world relative price of good X be equal to? (ii) Calculate the equilibrium wage rate w in A relative to that in B under free trade: w/w*.