Veronika Šlosárová, Patrícia Šovčíková
Determining the relative price after trade
Problem 1:
Home has 900 units of labor available. It can produce two goods, Barbies and Kens. The unit
labor requirement in Barbie production is 2 and Ken production is 4.
a) Graph Home’s PPF.
b) What is the opportunity cost of Barbies in terms of Kens?
c) In absence of trade, what would the price of Barbies in terms of Kens be?
Problem 2:
Home is described in Problem 1. There is now also another country, Foreign, with a labor
force of 630. Foreign’s unit labor requirement in Barbie production is 9, while in Ken
production is 3.
a) Graph Foreign’s PPF.
b) Construct the world relative supply curve.
Problem 3:
Now suppose world relative demand takes the following form:
𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝐵𝑎𝑟𝑏𝑖𝑒𝑠
𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝐾𝑒𝑛𝑠
=
𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝐾𝑒𝑛𝑠
𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝐵𝑎𝑟𝑏𝑖𝑒𝑠
a) Graph the relative demand curve along the relative supply curve.
b) What is the equilibrium price of Barbies?
c) Describe the pattern of trade.
d) Show that both countries gain from trade.
Problem 4:
Suppose that instead of 900 workers, Home has 1800. Find the equilibrium relative price.
What can you say about the efficiency of world production and the division of the gains from
trade between Home and Foreign in this case?
Problem 5:
Suppose that Home has 1800 workers, but they are only half as productive in both industries
as we have been assuming. Construct the world relative supply curve and determine the
equilibrium relative price. How do the gains from trade compare with those in case described
in Problem 4?
-suppose that PB = PK = $ 18