Consider two countries, A and B, with the technologies given by case 4 in Exercise 1.

data from exercise 1

1. For each of the following cases below determine the following:

(a) the pre trade relative prices;

(b) the direction of comparative advantage; and

(c) the limits to the relative wage rate.

 Suppose that the wage rate in A, WA, equals \($9\) per hour and the wage rate in B, when measured in dollars, E * WB, equals \($5\) per hour. Calculate the pre trade price of S and T in both A and B. Is there a basis for mutually beneficial trade? Why or why not? Suppose that WA rises to \($12\) per hour. Everything else held constant, what would happen to trade patterns? Why? What options are available to A to resolve this situation?

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Hours of Labor Required to Produce S or T Case 1 Case 2 A B A B S 9 15 S 10 6 T 3 12 T 4 6 Case 3 Case 4 A B A B S 9 8 S 4 9 T 18 4 T 2 3