International Trade Under Increasing Costs
Pre-Trade Equilibrium
|
United States
|
Rest of the World
|
|
|
Production
|
40C + 50W
|
60C + 77W
|
|
Consumption
|
40C + 50W
|
60C + 77W
|
|
Relative Price of Cloth
|
2 Bushels of Wheat
|
0.67 Bushels of Wheat
|
|
Relative Price of Wheat
|
0.50 Yards of Cloth
|
1.5 Yards of Cloth
|
Terms of Trade: 1 Bushel of Wheat = 1 Yard of Cloth
Free-Trade Equilibrium
|
United States
|
Rest of the World
|
|
|
Production
|
20C + 80W
|
80C + 60W
|
|
Consumption
|
60C + 40W
|
40C + 100W
|
|
Exports
|
40W
|
40C
|
|
Imports
|
40C
|
40W
|
|
Relative Price of Cloth
|
1 Bushel of Wheat
|
1 Bushel of Wheat
|
|
Relative Price of Wheat
|
1 Yard of Cloth
|
1 Yard of Cloth
|
Questions:
a. Which country has a comparative advantage in cloth? Wheat? Why?
b. Use General Equilibrium Analysis to show the gains from trade.
c. Use Partial-Equilibrium Analysis to measure the gains from trade.