Question

ome has 1200 units of L and Foreign has 3600 of units of L available. Both countries can produce coffee and cloth. The unit labour requirements for coffee and cloth in Home is 4 and 2 respectively. Likewise, it is 16 and 4 in Foreign. a. Write the equation and graph the PPF for both Home and Foreign. b. Which country has absolute advantage? Justify c. In which good does Home have a comparative advantage? Justify d. Construct the world RS curve. e. If there is free trade between the two countries, find equilibrium relative price of coffee, given Demand for Coffee/Demand for Cloth = Price of Coffee/Price of Cloth). f. Show pattern and gains from trade.

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