Chapter 10

 

Consider the Krugman model. Let us suppose that trade exists between two countries.
1.




Graph the following curves by clicking here
a.

Draw a graph with per capita consumption, c, on the horizontal axis, and the ratio of the price to the wage, P/W, on the vertical axis.
b.

Draw the PP line. Why is it upward sloping?
c. Draw the ZZ line. Why is it downward sloping?
d.
Label the equilibrium point "E." Label equilibrium per capita consumption on the horizontal axis as c1, and the equilibrium price-wage ratio on the vertical axis as (P/W)1.
e. Suppose now that protectionist sentiment causes this country to become closed to trade. Show this change on your graph. What would happen to the real wage as a result of this change?
f. Does the Krugman model explain intra-industry trade? Explain.

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