International Trade Theory and Policy
by Steven M. Suranovic

Trade 40

Trade 40

Trade Problem Set 40 3-1

1. Consider a Ricardian model. Suppose the US's unit-labor requirement for timber is 3, its unit-labor requirement for video cassette recorders (VCRs) is 8 and it has 48 million workers. Suppose Taiwan's unit-labor requirement for timber is 6, its unit-labor requirement for VCRs is 2 and it has 48 million workers.

a. Which country has the absolute advantage in each good? Which country has the comparative advantage? Explain.

b. Calculate each country's autarky price ratio. Then make up a plausible free trade price ratio. What are the levels of production and the pattern of trade when free trade occurs?

c. Calculate real wages for workers in both countries in autarky and free trade. Explain why everyone benefits from trade.

d. Suppose the US implements a costless technology improvement program which lowers the US unit-labor requirement for timber to 2. What effect would this have on world supply of timber? What effect would this have on the free trade price ratio? Explain how real wages would change in both the US and Taiwan.

International Trade Theory and Policy - Chapter 40: Last Updated on 7/18/06