Question

Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 1/2 ton of corn or 1 ton of wheat with a day of labor. Foreign produces 1 ton of corn and 1/2 ton of wheat. Suppose that, after trade occurs, the international price actually becomes 1.5 tons of wheat per ton of corn.

Required:
a. What is Home's price of corn in autarky?
b. How large is Home's labor force?

Answer 1

Home and Foreign

a. Home's price of corn in autarky = 2 tons of wheat

b. Home's labor force is half of the labor force of Foreign.

Step-by-step explanation:

a) Data and Calculations:

Number of countries involved in trade = 2

Number of goods produced = 2 (corn and wheat)

Country Tons of corn Tons of wheat

Home 1/2 1

Foreign 1 1/2

International price = 1.5 tons of wheat per ton of corn

Home's price of corn in autarky = 2 tons of wheat (1 / 0.5)

b) In international trade, when the international terms of trade settle at a level that is between each country's opportunity cost, both countries will benefit from the trade. One country will benefit while the other will lose when the trade terms are too above or below this opportunity cost.