This problem is based on the Ricardian Model. Assume that 2 countries, Stormland
ID: 2505668 • Letter: T
Question
This problem is based on the Ricardian Model. Assume that 2 countries, Stormlands and Reach, use White Walkers' labor to produce 2 goods, lumber and wheat.
(a) Use the information below to calculate the numbers instead of "?" marks in the Table. (Show and explain all your calculations).
In The No-Trade Equilibrium
Stormlands:
WageL = 24 WageW = ?
MPLL = 4 MPLW = ?
PL = ? PW = 4
Reach:
Wage*L = ? Wage*W = 6
MPL*L = ? MPL*W = 1
P*L = 3 P*W = ?
(b) Which country has a comparative advantage in wheat and why?
(c) Suppose that in the trade equilibrium PL/PW = 1.2. Which good which each country export?
(d) For each country, calculate the real wage in terms of lumber and in terms of wheat.
(e) For each country, compare the values you obtained in part (d) with the real wage in terms of either good in the no-trade equilibrium. Do White Walkers in each country gain from trade?
Explanation / Answer
Stromlands
for equilibrium
=>MPPL =WageL/P
=>4 = 24/PL
=>PL = 6
also for trade
WageL/PL =WageW/PW
=> 24/6 = wageW/4
=> WageW = 16
=> MPLW = 16/4 =4
therefore
Stormlands:
WageL = 24 WageW = 16
MPLL = 4 MPLW = 4
PL = 6 PW = 4
similarly for Reach
Reach:
Wage*L =3 Wage*W = 6
MPL*L = 1 MPL*W = 1
P*L = 3 P*W = 6
(b) Which country has a comparative advantage in wheat and why?
stromlands has comparitive advantage in wheat as it has more MPLW than Reach
c)
Suppose that in the trade equilibrium PL/PW = 1.2 , Whaet will be exported from stromlands as it has PL/PW =1.5 which is greater than 1.2
d)real wage for lumber in stromland = 24/4 =6 ,real wage for Reach = 3/3 =1
real wage for wheat in stromland = 16/4 =4 ,real wage for Reach = 6/6 =1
e)As in equilibrium real wage is decreased from 4 to 2. so both countries gain from trade
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