Trade Problem Set 40 1-1




1. Consider a Ricardian model with two countries, the US and Ecuador, producing two goods, bananas and machines. Suppose the unit-labor requirements are: aLBUS= 8, aLBE = 4, aLMUS = 2, aLME = 4. Let the US have 3200 workers and Ecuador have 400 workers.

A. Which country has the absolute advantage in bananas? Why?

B. Which country has the comparative advantage in bananas? Why?

C. What is the autarky terms of trade in the US?

D. What would the pattern of trade be in free trade? Why?

E. How much of each good would Ecuador produce in free trade if complete specialization occurred?

F. Specify a plausible free trade terms of trade.

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Last Updated on 7/18/06