1. Use the following figure to answer to the questions:
a. Using the figure above determine the value of the following for the importing country:
-Producer surplus before and after trade
-Consumer surplus before and after trade
-Net changes in producer and consumer surplus
-Net changes in total surplus
b. Using the figure above determine the value of the following for the exporting country:
-Producer surplus before and after trade
-Consumer surplus before and after trade
-Net changes in producer and consumer surplus
-Net changes in total surplus
2. Consider the following Ricardian example, using standard Ricardian assumption:
Vintland Moonited
Labour hours per bottle of wine 5 7.5
Labour hours per kg of cheese 2 5
a) Which country has an absolute advantage in wine? In Cheese?
b) Which country has a comparative advantage in wine? Cheese? (Calculate the opportunity
cost of wine and cheese in each country.) Put the numbers in the following table:
Vintland Moonited
Wine price
Cheese price
c) Suppose that Vintland has 10 million hours of labour and Moonited has 15 million hours
of labour. Graph each country’s production possibilities curve. If Vintland produces 3
million cheese and Moonited produces 1.5 million kilos of cheese, how much wine is
produced by each country? Show all on graph.
d) When trade opened which country exports which good? Suppose the international price is
½ bottle of wine per kilo of cheese, what happens to production in each country (in terms
of specialization of goods)?
e) In this free-trade equilibrium, 2 million kilos of cheese and 1 million bottle of wine are
traded. What is the consumption point in each country with free trade? Show this
graphically. Also show vertical and horizontal intercepts of the trade lines for each
country.
f) Does each country gain from trade? Explain, referring to your graphs as is appropriate.
3. Use the following figure to answer to the questions:
a. Suppose that the international relative price of cloth goes up. How will this affect
the trade line and optimal level of consumption in the cloth exporting country? How
would this impact the production in the exporting country? Show on the graph and
explain (don’t worry about numbers).
b. Is this change in the international relative price an improvement or deterioration in
the terms of trade of the rest of the world? According to your graph, does the rest of
the world gain or lose well-being? Explain!
4. The country A has an endowment (total supply) of 160 units of labor and 14 units of
land, whereas country B has 40 units of labor and 6 units of land. Is country B labor or
land abundant? If wheat is land-intensive and cloth is labor-intensive, what is the
Heckscher-Ohlin prediction for the pattern of trade between country A and country B?

Sample Solution