How to trade world markets?

Difficult economic question on Differences in labor productivity and gains from trade?

• Please help, ive tried mybest to figure out this important economic question in class but have no luck! Exercise 5. Differences in labor productivity and gains from trade Consider two countries, Home and Foreign: each of them can produce two goods, TV systems (T) and Cars (C). Home has 1,200 units of labor while Foreign has a labor force of 900 (total resources are fixed). There is perfect mobility of labor across sectors while not across countries, and markets are perfectly competitive. The ULR of each country for the production of each good are listed in Table 3 - The production trade-off; ULR for TV sys. and CarsTV systems and Cars Home: aLT = 8 aLC = 4 Foreign: a*LT = 2 a*LC = 3 1. Compute the countries’ labor productivity in the production of each good, and explain how the countries are (with respect to each other) in terms of absolute advantages in the production of T and C. 2. Graph the production possibility frontier (PPF) of each country, derive the opportunity-cost of T in terms of C in each of them, and explain how countries are (with respect to each other) in terms of comparative advantages in the production of T and C. 3. In the absence of trade (autarky), what would be the relative price of T in the Home country? Why? 4. Assume that trade between countries is now allowed: construct the world relative supply curve of T with respect to C (RsTC ). 5. Assuming that the world relative demand of T with respect to C takes the following form: with respect to C takes the following form: RDtc = 2 PC/PT graph the relative demand curve, individuating the (international) equilibrium relative price of T with respect to C. 6. Describe the patterns of trade and show that both Home and Foreign gain from trade. 7. Obtain the relative wage after trade, and explain why the country with the higher wages can compete in the international market.

• Answer:

  Your instructors really know how to make a simple problem into an egghead equation, don't they? World trade is still a mess in spite of their obfuscation.