THE CLASSICAL MODEL: ABSOLUTE AND COMPARATIVE ADVANTAGE (Continued)

Please do the following exercises from the text.

P 61: Ex. 1-Case 2 only

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Goods Country A Country BA's relative effic.=B's hour/A's hour

S10 hrs>*5 hrs5/10

T*4<55>

Determine: the following:

(a)The pre-trade relative prices for S and T

(b)Direction of comparative advantage (determine in what goods the countries have a comparative advantage).

(c)Limits to the relative wage W^A/E.W^B where E is the exchange rate

P 61: Ex 6. Place good S on the horizontal axis. The fact that the autarky P_S/P_T increased from 5/4 to the ITOT_S = 2 gives an indication of where the comparative advantage lies. Exporting countries experience an increase in relative price after they open up for free trade, while importing countries face a decrease in that relative price

Please use this information from Exercise 5 when you solve this exercise.

Use the information in Ex. 5to plus the following additional information to graph Country A's trade triangle:

World's relative price = 2; and

Country A's imports= 2,000.

What's Country A's export?

Ex. 5 (not required but ex 6 which depends on it is required)

Suppose there are 20,000 hours of labor availability in Country A. Five hours of labor are required to produce 1 unit of S, while four hours are required to produce 1 unit of T.Find the shape and dimensions of Country A's PPF.