a) In this scenario, Home will export the more labor-intensive product, wine, to Foreign, while Foreign will export the more land-intensive product, cheese, to Home.
b) In this scenario, Home will still export the more labor-intensive product, wine, to Foreign, while Foreign will export the more land-intensive product, cheese, to Home. However, due to the differentiated products in the cheese industry, Foreign may be able to charge a higher price for its cheese exports, resulting in a higher level of exports from Foreign to Home.
c) In this scenario, the two countries will still trade, as the land/labor ratio is now the same in both countries. Home will still export the more labor-intensive product, wine, to Foreign, while Foreign will export the more land-intensive product, cheese, to Home. However, the level of trade may be lower than in the previous scenarios, as the comparative advantage of each country is now less pronounced.
2. Consider two countries, Home and Foreign. Assume that Home is labor-abundant while Foreign is land-abundant. Also suppose that there are two industries, wine and cheese, with wine being the more labor-intensive industry.
a) Suppose that both wine and cheese industry produce homogeneous products and are perfectly competitive. What is the pattern of trade between Home and Foreign?
b) Now suppose that the cheese industry produces differentiated products and is therefore characterized by monopolistic competition. Wine industry is still perfectly competitive. What is the pattern of trade between Home and Foreign?
c) Finally, in addition to the assumption of part (b), suppose that Foreign has experienced population growth, and as a result both Home and Foreign now have exactly the same land/labor ratio. Will the two countries trade?
1 answer
1 answer