The world consists of two countries only: Alpha (A) and Beta (B). Each country produces two...

 

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The world consists of two countries only: Alpha (A) and Beta (B). Each country produces two goods, X and Y, only. In addition, trade can be described by the Ricardian Model. You are given the following information (which applies to the whole question, unless otherwise stated): In Alpha, one unit of labour can make 15 units of X or Y. In Beta, a unit of labour can produce 30 units of X, and their productivity doubles if the same labour is employed in the production of Y. Alpha is endowed with 400 units of labour, which is one-hundred units more than Beta's. The free-trade relative price of X is the weighted average of both countries' autarky relative prices, and the weight attached to the autarky (relative) price of Alpha is 60%. Both countries agree to trade 3500 units of X. Note: Keep your answer to 2 decimals places if needed. Be sure to show your work. a) Which country will export good X? Explain. (4 points) b) Find the production and consumption bundles of Beta under free trade. (5 points) Now, due to changes in industry structure, the labour productivity of Y in Alpha has dropped by 3 units. c) What happens to the free-trade relative price of X? Find the new production and consumption bundles of Beta. (7 points) d) Illustrate your answers in parts (b) & (c) in a well-labeled diagram (label good X on the horizontal axis). (14 points) Make sure to identify levels of exports and imports before and after the change in productivity of good Y in Alpha and label the slopes of the PPFS and budget constraints. No written explanation is needed and no need to include the indifference curves. The world consists of two countries only: Alpha (A) and Beta (B). Each country produces two goods, X and Y, only. In addition, trade can be described by the Ricardian Model. You are given the following information (which applies to the whole question, unless otherwise stated): In Alpha, one unit of labour can make 15 units of X or Y. In Beta, a unit of labour can produce 30 units of X, and their productivity doubles if the same labour is employed in the production of Y. Alpha is endowed with 400 units of labour, which is one-hundred units more than Beta's. The free-trade relative price of X is the weighted average of both countries' autarky relative prices, and the weight attached to the autarky (relative) price of Alpha is 60%. Both countries agree to trade 3500 units of X. Note: Keep your answer to 2 decimals places if needed. Be sure to show your work. a) Which country will export good X? Explain. (4 points) b) Find the production and consumption bundles of Beta under free trade. (5 points) Now, due to changes in industry structure, the labour productivity of Y in Alpha has dropped by 3 units. c) What happens to the free-trade relative price of X? Find the new production and consumption bundles of Beta. (7 points) d) Illustrate your answers in parts (b) & (c) in a well-labeled diagram (label good X on the horizontal axis). (14 points) Make sure to identify levels of exports and imports before and after the change in productivity of good Y in Alpha and label the slopes of the PPFS and budget constraints. No written explanation is needed and no need to include the indifference curves.

Answer rating: 100% (QA)

a Alpha will export good X This is because in Alpha labor productivity is higher for good X 15 units ... View the full answer