Suppose the UK and Portugal use units of labor to produce linen, cloth, wine, and sardines,...

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Suppose the UK and Portugal use units of labor to produce linen, cloth, wine, and sardines, where Portugal's unit labor requirements for the goods relative to that for the UK, a*/a are given as: Linen: Cloth: Wine: Sardines: 100/100 90/100 80/120 50/100 If the wage rate o* in Portugal is normalized to 1, then the relative wage is given by the UK wage rate co. The supply of labor in the UK and Portugal are L and L* respectively. (1) Using the chain of comparative advantage, explain which goods will be produced by the UK and Portugal if = 0.7. If the relative wage falls to co = 0.6, how does the pattern of comparative advantage change? As its relative wage falls, discuss how UK trade adjusts at both the extensive and intensive margin. (ii) Using the previous data, and the appropriate functions for the UK's demand and supply for labor, and assuming the UK has 50 percent of the total labor force, show how to derive the equilibrium relative wage. If the UK's supply of labor increases to 75 percent of the total labor force, what will happen to the relative wage and the number of goods produced in the UK? (iii) Now suppose that there is a continuum of goods in the range 0 to 1. Use the appropriate diagram to show how many goods are produced in the UK, and how many in Portugal. (iv) Suppose the UK's labor productivity uniformly increases across the continuum of goods, what happens to both the relative wage and the number of goods the UK will produce in equilibrium? (v) If Portugal's labor force increases, what happens to the UK's relative wage? Suppose the UK and Portugal use units of labor to produce linen, cloth, wine, and sardines, where Portugal's unit labor requirements for the goods relative to that for the UK, a*/a are given as: Linen: Cloth: Wine: Sardines: 100/100 90/100 80/120 50/100 If the wage rate o* in Portugal is normalized to 1, then the relative wage is given by the UK wage rate co. The supply of labor in the UK and Portugal are L and L* respectively. (1) Using the chain of comparative advantage, explain which goods will be produced by the UK and Portugal if = 0.7. If the relative wage falls to co = 0.6, how does the pattern of comparative advantage change? As its relative wage falls, discuss how UK trade adjusts at both the extensive and intensive margin. (ii) Using the previous data, and the appropriate functions for the UK's demand and supply for labor, and assuming the UK has 50 percent of the total labor force, show how to derive the equilibrium relative wage. If the UK's supply of labor increases to 75 percent of the total labor force, what will happen to the relative wage and the number of goods produced in the UK? (iii) Now suppose that there is a continuum of goods in the range 0 to 1. Use the appropriate diagram to show how many goods are produced in the UK, and how many in Portugal. (iv) Suppose the UK's labor productivity uniformly increases across the continuum of goods, what happens to both the relative wage and the number of goods the UK will produce in equilibrium? (v) If Portugal's labor force increases, what happens to the UK's relative wage?

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i At a relative wage of co07 the UK will have a comparative advantage in linen and cloth while Portu... View the full answer