There are two separate countries Delta and Gamma which produce only two types of goods: food and manufacturing. Each industry is said to be in perfect competition. We assume that there is no scarcity of capital in each country and, consequently, labour is the only factor of production for both goods. The relative demand for food is observed to be the same for both countries and equal to (with no trade barriers): DF/DM=4*PM/PF where DF stands for quantity of food goods demanded, PM – price per unit of manufacturing produced, PF – price per unit of food produced.Additionally, a worker residing in Delta can produce one unit of food within 1 hour (aLFD) while one unit of manufacturing takes 40 hours (aLMD) to be produced for the same worker. Meanwhile, workers in Gamma are less productive managing to produce one unit of food in 2 hours (aLFG) and one unit of manufacturing in 150 hours (aLMG).Relative demand versus relative supply curve for present situation is depicted below where RD stands for relative demand, RS – relative supply, QF – quantity of food goods, QM – quantity of manufacturing goods, LD – total labour force in Delta, LG – total labour force in Gamma. RS intersects RD where DF/DM is equal to quantity of food goods supplied divided by quantity of manufacturing goods supplied. , where DF stands for quantity of food goods demanded, DM – quantity of manufacturing is equal toquantity of food goods supplied divided by quantity of manufacturing goods supplied. Delta and Gamma are considering signing a bilateral agreement regarding free movement of labour.Before the agreement is signed Delta and Gamma has 200,000 and 100,000 workers respectively who cannot move between countries yet. Assume that each worker works 40 hours per week to determine relative price of food, relative production of food per week and the size of trade between two counties(imports, exports).
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Firstly, the graph givesus information that gamma only produces food, judging by their productivity. Onthe other hand delta produces both – food and manufacturing goods. (Therelative demand intersects with the relative supply line, where PF/PM is higherthan alfg/almg and is equal to alfd/almd.) Gamma produces 100 000* 40/2= 2*10^6units of food, Delta – 200 000*40/1=8*10^6. For Delta the alternativeprice per one unit of food is 1/40 of one unit manufacturing. The relativeprice for Delta is two hours, for Gamma- one hour. Delta can produce (4*40/1=160/1=> Df/Dm= 160/1) 8*10^6/160=50 000 units of manufacturing.I don't understand how the trading between delta and gamma works. Later I'll have to determine relative price of food, relative production of food per week and the size of trade between twocountiesand indicate number of workers in each country after the agreement is signed (the only factor affecting the choice of worker‟s preferred residing place is wage, labour hours to produce different units remain constant)I'm lost.
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Hi! I'm stuck on an international econ task. Need help, please:) watch
- Thread Starter
- 08-11-2015 22:10