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Question: 1 explain the effect of an increase in country 2s...

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1. Explain the effect of an increase in country 2’s productivity on the pattern of trade, relative wages, and real income in each country using the Dornbusch-Fischer-Samuelson model. A good answer will be a carefully written explanation supplemented by graphs.

2. In a five country-two commodity Classical model of trade, where the autarky price ratios in all five countries are different, can you conclude a priori that all five countries will desire to trade? Why or why not? Between which of the five countries is trade certain? What will determine which of the remaining countries will trade?

3. Is it possible for trade to take place in the Classical model of trade without complete specialization of production in both countries? If so, when? Who will receive the gains from trade in this instance? Why?

4. Given the following Ricardo-type table shows the labor input required per unit of output in each of the two industries in each of the two countries:

Shirts              Brandy

United States                        4 days             12 days

France                              6 days             12 days

What is the autarkic price ratio in both countries?

Which country has comparative advantage in which product?

What are the possible terms of trade at which the U.S. and France would choose to trade?

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