Consider the MPLs of the following countries. Country MPL of Wheat MPL of Cloths

Question

Consider the MPLs of the following countries.

Country                      MPL of Wheat                        MPL of Cloths

A (25 people)                         6                                              2

B (100 People)                      3                                              1

C (100 People)                       1                                              1

Now consider the trade between Countries A and C.

a. What is the price ratio in Country C in an autarky?

b. Which country will produce only wheat when they trade?

c. Which country will produce only cloths when they trade?

d. What should be the world price ratio in trade equilibrium (indicate a range)

e. Show new points of consumption and production on PPFs of the two countries.

f. Show exports and imports of wheat and cloths in the two countries.

g. If the world price ratio is 2/3 (Pw/Pc) and wheat price is $1, what is the world price of cloths?

h. What is the nominal wage in Country A?

i. What is the nominal wage in Country B?

g. What is the real wage in Country A in terms of wheat?

k. What is the real wage in Country A in terms of cloths?

l. What is the real wage in Country C in terms of wheat?

m. What is the real wage in Country C in terms of cloths?

Explanation / Answer

a. In autarky, the price ratio in Country C will be Marginal product of wheat / Marginal Product of cloth = 1 /1 = 1.

b. Country A will produce only wheat when they trade as because Country A has highest value of marginal productivity of wheat as compared to Country B and Country C.

c. Country C will only produce cloth when they trade.

d. The world price ratio will lie between 3 and 1.

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