# Suppose that Cuba and Montserrat, two Carribian island economies start trading with each other. There are two goods in the economy: sugarcane and mangoes. The unit labour requirements for sugarcane are 5 and 4 respectively for Cuba and Montserrat. The unit labour requirements for mangoes are 20 and 10 respectively for Cuba and Montserrat. The total labour force in Cuba is 1000 and it is 500 in Montserrat. In which good(s) does Cuba have an absolute advantage? In which does it have a comparative advantage? Who will be exporting what in a free trade equilibrium?Draw the supply and demand schedules for mangoes relative to sugarcane for the economy as a whole i.e. taking both countries together. Note that the relative supply curve can be determined with precision while the representation of the demand curve is slightly random.Suppose that the relative price of mangoes is 3. Show that both countries gain from Trade.Determine the wage level in Cuba relative to the wage level in Montserrat. Why would Montserrat want to trade with cuba if the latter is simply taking advantage of the formerís lower wages? Is there a contradiction between free and fair trade?Now assume that due to volcanic activity 3/5 of Montserratís population migrates to Cuba. What happens to the relative price of mangoes? What happens to the gains from trade in each country?

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1. Suppose that Cuba and Montserrat, two Carribian island economies start trading with each other. There are two goods in the economy: sugarcane and mangoes. The unit labour requirements for sugarcane are 5 and 4 respectively for Cuba and Montserrat. The unit labour requirements for mangoes are 20 and 10 respectively for Cuba and Montserrat. The total labour force in Cuba is 1000 and it is 500 in Montserrat.

In which good(s) does Cuba have an absolute advantage? In which does it have a comparative advantage? Who will be exporting what in a free trade equilibrium?

Draw the supply and demand schedules for mangoes relative to sugarcane for the economy as a whole i.e. taking both countries together. Note that the relative supply curve can be determined with precision while the representation of the demand curve is slightly random.

Suppose that the relative price of mangoes is 3. Show that both countries gain from Trade.

Determine the wage level in Cuba relative to the wage level in Montserrat. Why would Montserrat want to trade with cuba if the latter is simply taking advantage of the formerís lower wages? Is there a contradiction between free and fair trade?

Now assume that due to volcanic activity 3/5 of Montserratís population migrates to Cuba. What happens to the relative price of mangoes? What happens to the gains from trade in each country?

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Step 1

Cuba doesn't have absolute advantage in either mangoes or sugarcane as unit labor requirements are greater than that of Montserrat.

Now,

So, Cuba has comparative advantage in sugarcane and exports it. Montserrat has comparative advantage in mangoes and exports it.

Step 2

the supply of sugarcane and mongoes is equal to labor supply divided by unit labor requirements foreach good. So, total supply of sugarcane= 50 units and total supply of mangoes= 50 units.

Step 3

Relative price of mangoes is 3 in free trade. Relative price for mangoes is 4 in Cuba and 2.5 in Montserrat. In free trad...

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