Trade: Equilibrium prices (cont.) International Commercial Policy TheRicardianModel In the remaining knife-edge intermediate cases, Home’s and/or Foreign’s economy may be diversified: � If P C /P W = a LC /a LW, Home offers the same wage in both industries so that Home’s workers are indifferent where they work. � If P C /P W = a* LC/a* LW, Foreign offers the same wage in both industries so that Foreign’s workers are indifferent where they work. 34
Trade: Equilibrium prices (cont.) 35 Relative price of cheese, P C /P W = P* C /P* W a * LC/a * LW a LC /a LW L/a LC L * /a * LW RS International Commercial Policy TheRicardianModel Relative world quantity of cheese, Q C + Q * C Q W + Q * W
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