Question

Suppose that there are two countries A and B. The countries are embedded withequal labor forces ̄LA= 100 = ̄LB. There are two product types: agriculture and manufac-turing. The production technologies of the countries are summarized by the following tableof marginal product of labor figuresProductCountryAgricultureManufacturingA12B23Assume that the consumers have same preferences across the countries. The optimal con-sumption path in each country can be expressed by the equation 4Qag= 5Qma; that is,the number of units manufacturing products should 4/5 of the units of the agriculturalproducts.(a) Find the autarky competitive equilibrium in both countries.(b) Consider a partial specialization scenario after-trade:QTag= 20 andQTma= 35. Whichcountry is exporting what? What is the relative price after trade? Calculate the newquantities produced and consumed in both countries after international trade.

Answer 1

a)

Autarky competitive equilibrium occur when demand is equal to supply.

$Country \space A=\frac{1}{2}=0.5\\Country \space B=\frac{2}{3}=0.77$

b)

$Agriculture=4×20=80\\manufacturing=5×35=175$

Country A export manufacturing products.

Country B export agricultural products.

Relative price for agricultural is 4 whole for manufacturing is 5.

New quantity for agricultural products =80

New quantity for manufacturing products=175