HOMEWORK 5 (RICARDIAN THEORY) ECO 41 FALL 2015 UDAYAN ROY
Each correct answer is worth 1 point. However, the maximum score is 20 points. This homework is due on Wednesday, October 21. Please show your answers on the answer sheet (on the last page).
Consider a Ricardian world with two countries, America and Brazil, and two goods, meat and textiles.
Table 1 / Amount made in 1 hourMeat (tons) / Textiles (yards)
America / 100 / 50
Brazil / 10 / 20
Let the nominal wage be w. And let pM and pT be the nominal prices of Meat and Textiles. Then, w/pM is the real wage in terms of Meat. (That is, w/pM is the amount of Meat that can be purchased with the income from one hour’s work.) Similarly, w/pT is the real wage in units of Textiles (or, cloth). Finally, let PMT = pM / pT be the price of Meat in terms of Textiles. (That is, PMT denotes the amount of Textiles that can be traded for one unit of Meat.)
Please calculate and write down the autarky values of the variables indicated. (If the answer is an integer, such as 6, simply enter 6 as your answer; there is no need to mention the units or any other information.)
autarky / pM / pT / w/pM / w/pTAmerica / 1. ½ yards of textiles / 2. 100 tons / 3. 50 yards
Brazil / 4. 2 yards / 5. 10 tons / 6. 20 yards
7. Continuing with the previous questions, if autarky ends and free trade begins, PMT, the relative price of a ton of meat (as measured in yards of textiles), will
a. increase in America and decrease in Brazil
b. decrease in America and increase in Brazil
c. increase in both America and Brazil
d. decrease in both America and Brazil
8. Continuing with the previous question, under free trade
a. America will export meat to Brazil and import textiles from Brazil
b. America will export textiles to Brazil and import meat from Brazil
c. America, which is more productive than Brazil in the production of both meat and textiles, will export both goods to Brazil
d. America, which is less productive than Brazil in the production of both meat and textiles, will import both goods to Brazil
e. No trade will take place when free trade is allowed, because mutual gains from trade are impossible in this case
9. Continuing with the previous questions, if autarky ends and free trade begins,
a. America will increase its production of meat, and Brazil will increase its production of textiles
b. America will increase its production of textiles, and Brazil will increase its production of meat
c. America, being the more productive country, will increase its production of both meat and textiles. Brazil will reduce its production of both meat and textiles. In this way free trade ensures that goods are produced where they can be made in the most productive way
d. America, being the less productive country, will decrease its production of both meat and textiles. Brazil will increase its production of both meat and textiles. In this way free trade ensures that goods are produced where they can be made in the most productive way
Let us continue with the data in Table 1. But unlike questions 1 through 6, which assumed autarky, let us now assume free trade.
Let PMT = 1 in free trade. In the adjoining table, write down the free trade values of the variables indicated. (If the answer is an integer, such as 6, simply enter 6 as your answer; there is no need to mention the units or any other information.)
Free trade / w/pM / w/pTAmerica / 10. 100 tons / 11. 100 yards
Brazil / 12. 20 tons / 13. 20 yards
14. Continuing with the previous question, a comparison of the autarky real wages with the free trade real wages—under the assumed free trade value PMT = 1 for the relative price of meat—shows that
a. workers gain from free trade in the rich countries but not in the poor countries
b. workers gain from free trade in the poor countries but not in the rich countries
c. Workers gain from free trade in both countries. Real wages increase, whether they are measured in units of the exported good or in units of the imported good
d. Workers gain from free trade in both countries. Real wages increase when they are measured in units of the exported good, and remain unchanged when measured in units of the imported good
e. Workers gain from free trade in both countries. Real wages increase when they are measured in units of the imported good, and remain unchanged when measured in units of the exported good
Consider a Ricardian world with two countries, America and Brazil, and two goods, guns and tomatoes
Table 2 / Hours of labor needed to make …One Gun / One bushel of tomatoes
America / 10 / 5
Brazil / 1 / 4
Let the nominal wage be w. And let pG and pT be the nominal prices of Guns and Tomatoes. Then, w/pG is the real wage in units of guns. That is, w/pG is the number of guns that can be purchased with the income from one hour’s work. Similarly, w/pT is the real wage in units of Tomatoes. Finally, let PGT = pG / pT denote the amount of tomatoes that can be traded for one gun and, therefore, be the price of guns in terms of tomatoes.
In the table below, write down the autarky values of the variables indicated.
autarky / pG / pT / w/pG / w/pTAmerica / 15. 2 bushels of tomatoes / 16. 1/10 gun / 17. 1/5 bushels of tomatoes
Brazil / 18. ¼ bushels of tomatoes / 19. 1 gun / 20. ¼ bushels of tomatoes
21. Continuing with the previous question, if autarky ends and free trade begins, PGT, the relative price of a gun as measured in bushels of tomatoes, will
a. increase in America and decrease in Brazil
b. decrease in America and increase in Brazil
c. increase in both America and Brazil
d. decrease in both America and Brazil
22. Continuing with the previous question, under free trade
a. America will export guns to Brazil and import tomatoes from Brazil
b. America will export tomatoes to Brazil and import guns from Brazil
c. America, which is more productive than Brazil in the production of both guns and tomatoes, will export both goods to Brazil
d. America, which is less productive than Brazil in the production of both guns and tomatoes, will import both goods to Brazil
e. No trade will take place when free trade is allowed because mutual gains from trade are impossible in this case
ANSWER SHEET HOMEWORK 5 (RICARDIAN THEORY) ECO41 FALL 2015 UDAYAN ROY
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DATE: ______
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