Consider a two-country, two-good world. Trade is based on comparative advantage. You are given the following information (which applies to the whole question, unless otherwise stated):

• One labour can produce 2 computers (C) or 20 pairs of shoes (S) in Home (H); while one labour can produce 1 computer or 15 pairs of shoes in Foreign (F).
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• Home has 250 workers while Foreign has 200 workers.
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• The free-trade relative price of a computer is a weighted average of the countries’ autarky relative price in which 60% of the weight is attached to Home’s autarky price.
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a) Which country will import computers? Explain.

b) Find the production and consumption bundle for Home under free trade.

Now, suppose the Home country experiences a technological improvement such that the labour productivity for making shoes doubles.

c) What happens to the free-trade relative price of computers? Explain.

d) Find the production and consumption bundle for Home under free trade.

Answer rating: 100% (QA)

Part a Foreign will import computers Heres the reasoning Comparative advantage In Home 1 labor produces 2C or 20S so the opportunity cost of 1C is 10S 20S 2C In Foreign 1 labor produces 1C or 15S so t... View the full answer