Question 1

Consider two countries, Home and Foreign, that each produce two goods, an agricultural product and a manufacturing product. Each country in endowed with a specific amount of labor and has a unit labor requirement for producing each product. Home is endowed with 900 units of labor, and Foreign is endowed with 600 units of labor. The unit labor requirements are given as:

	HOME	FOREIGN
Unit Labor Requirement for Agricultural Product	aA=0.25	aA=0.20
Unit Labor Requirement for Manufacturing Product	aM=0.75	aM=0.80

Part (i):Construct each countries PPF. Place the agricultural product on the horizontal axis and the manufacturing product on the vertical axis.

Part (ii):Which country has the comparative advantage in the production of the agricultural product?

Part (iii):Which country has the comparative advantage in the production of the manufacturing product?

Part (iv):If these countries were to specialize and engage in trade, which country would produce and export each good?