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Consider a general model of Ricardian trade with 2 countries (Home and Foreign) and 2 goods (Clothing and Food): unit labor costs are aLC and aLF in Home and a∗LC and a∗LF in Foreign. Home and Foreign are endowed, respectively, with L and L∗ units of labor. Workers in both countries have the same preferences represented by a Cobb-Douglas utility function:Consider a general model of Ricardian trade with 2 countries (Home and Foreign) and 2 goods (Clothing and Food): unit labor c

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Answer #1

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Assume a two country Ricardian model with two countries H and Fo; two goods C and F and one factor of production L. T home fo

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The world price (PT) should be such that two country completely spacializes in free trade. Thus, Now has both country has the

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Therefore, L* a * LF Pr The increase in home labor force L will decrease the world price PTor increase in labor productivity

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