1. When Home has a comparative advantage over Foreign in cloth,
A. The Autarky relative price of cloth in terms of wine is lower at Home than in Foreign:
B. Foreign must have a comparative advantage over Home in wine
C.Home will specialize in producing cloth when there is free trade
D. Both (A) and (B) are correct
E. (A), (B), and (C) are correct.
2. In the Ricardian Model, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <aLC/ aLW where aLC and aLW are unit labor requirements for cloth and wine in Home and aLC and aLW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. aLC decreases. Then it is the case that:
A. The relative price of cloth (vs. food) may go down.
B. The terms of trade of Foreign must improve
C. The terms of trade of Home may remain unchanged.
D. (A) and (C)
E None of the above
1. When Home has a comparative advantage over Foreign in cloth,
A. The Autarky relative price of cloth in terms of wine is lower at Home than in Foreign:
B. Foreign must have a comparative advantage over Home in wine
C.Home will specialize in producing cloth when there is free trade
D. Both (A) and (B) are correct
E. (A), (B), and (C) are correct.
2. In the Ricardian Model, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <aLC/ aLW where aLC and aLW are unit labor requirements for cloth and wine in Home and aLC and aLW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. aLC decreases. Then it is the case that:
A. The relative price of cloth (vs. food) may go down.
B. The terms of trade of Foreign must improve
C. The terms of trade of Home may remain unchanged.
D. (A) and (C)
E None of the above
Related textbook solutions
Related questions
You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:
| Labor Hours Per Unit of Rice | Labor Hours Per Unit of Cloth | |
| Pugelovia | 75 | 100 |
| Pomerania | 50 | 50 |
You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.
1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?
2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?
3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?
4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?
5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?
6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.
