Consider a Ricardian Model of Trade. There are two countries, Home and Foreign, who produce two goods Food and Clothing, using one factor of production, Labor

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: Depict the trading equilibrium and the prices, production, imports and exports by each country in your graph. You do not need to solve for it alge- braically, just on graph paper. c: What happens to equilibrium prices if labor migrates from foreign to home so that home has 90 workers and foreign has 30. Labor that migrates then has the same productivity as native labor. d: Would labor that stayed behind in Foreign gain or lose from this migration? Why? (What happens to the budget set of a Foreign worker? If it expands, he must gain.) e: Suppose productivity abroad quadrupled, that is, the unit labor require- ments fell to 1/4 of the levels above. (Note that in this case Foreign has an absolute advantage in both goods.) What happens to world prices? Do home workers gain from foreign becoming more productive ? Do foreign workers gain from its productivity improvement? (Comparisons should be relative to the outcome in part b) f: Can the PPF when labor is mobile between countries lie strictly outside the world PPF through trade or must it touch it somewhere? Can you give conditions under which they would touch at some point and when they would
not? (Hint: consider what happens when one country has an absolute advantage in both goods and when this is not the case.) 1 g: Given your answers to part f:, how would you respond to the following quote: Given the lack of trade barriers today, there are orders of magnitude more gains to be had from permitting labor migration than trying to further liberalize trade. 2. This problem asks you to think of issues using a relative demand and sup- ply framework more generally. The U.S. and the rest of the world(ROW) are the two countries in the world. They make two goods, Food (F) and Wine (W) The U.S. exports W: a: What would be the e¤ect of an advertising campaign to promote W in the ROW? ( Assume that the advertising campaign makes foreigners demand more W relative to F at any relative price.) What would shift? What would happen to relative prices in the world? Would the U.S. gain or lose from such advertising if advertising is essentially costless? b: A war destroys half of ROWs productive capacity shrinking its Production
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Page 5 and 6: symmetric so that in equilibrium p

Consider a Ricardian Model of Trade. There are two countries, Home and Foreign, who produce two goods Food and Clothing, using one factor of production, Labor

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