Question: Using the results from Problem, explain why the Ricardian model predicts that Mexico would gain more than the United States when the two countries signed the North American Free Trade Agreement, establishing free trade between them.
Problem: (This is a harder question.) Suppose that the Home country is much larger than the Foreign country. For example, suppose we double the number of workers at Home from 25 to 50. Then Home is willing to export up to 100 bushels of wheat at its no-trade price of PW /PC = 1/2 rather than 50 bushels of wheat as shown in Figure. In the following, we draw a new version of Figure, with the larger Home country.
a. From this figure, what is the new world relative price of wheat (at point D)?
b. Using this new world equilibrium price, draw a new version of the trade equilibrium in Home and in Foreign, and show the production point and consumption point in each country.
c. Are there gains from trade in both countries? Explain why or why not.
