Consider the economy of two countries: England (E) and China (C) initially not trading with each other. Each country has 1000 workers for producing bananas (B) and roses (R). An English worker can produce 10 roses or 25 bananas while a Chinese worker can produce 50 roses or 30 bananas.

(a) Draw the production possibilities frontier for England and China. What does the slope of the production possibilities frontier represent? Explain.

(b) When both countries open to trade,

i. What pattern of trade would one expect?

ii. What do we know about the relative price of roses under free trade?

iii. How does allocation of workers across industries change after trade?

(c) Are English workers better off in terms of bananas and roses under free trade? Explain your answer.

(d) Is the wage in England higher than that in China after opening to trade? Explain your answer.

Answer rating: 100% (QA)

England and China has 1000 workers each England can prod... View the full answer