Suppose that a small open economy has 200 workers and that its technology requires 1 worker-hour per unit of food (thus 1 unit of food per worker-hour) and 3 workerhours per unit of cloth (thus output per worker-hour = 1/3). In autarky, it employs 100 workers in each of the two industries. With free trade, it faces world prices of $10 per unit of food and $20 per unit of cloth.
a. Suppose that in autarky, workers in both industries are paid $8 per hour. What are the autarky prices of food and cloth?
b. When the country opens to free trade, under the normal assumptions of the Ricardian model, what will it produce, import, and export? From the information given, can you determine the quantities of any of these? What is the country's national income with trade, measured in dollars?
c. Suppose, contrary to the normal Ricardian Model assumptions, that when trade is opened, workers are unwilling or unable to change occupations, so that we continue to have 100 workers in each industry. What, then, is the national income of the country, in dollars, and how does it compare to the national income you got in part (b) when workers were mobile?
d. What are the wages of the two groups of workers in part (c)?