CSCCSC Large/Small Country Y X ASCASC CLCCLC SC Imports SC Exports U LC Small Country = SC Large Country = LC LC consumption point in autarchy & trade LC Exports LC Imports QLCQLC LC production point with trade U SC SC consumption point with trade Q SC

Summary of Small vs. Large Country Small EconomySmall Economy –Receives maximum gains available by opening trade. –As a price-taker, it trades at the relative prices set by the large economy. –Completely specializes in good for which it has the comparative advantage. Large EconomyLarge Economy –Receives no gains from trade with small nation. –No change in its production constraint. –Produces both goods after trade, though more of good in which it has comparative advantage.

Trade in Multi-Commodity World Pattern of trade in multi-commodity world depends on relative labor requirements versus ratio of relative wages. Also can see effects of change in exchange rate or relative wages on the pattern of trade. ClothWineBread Relative Wages CheeseToolsPots a* LC /a LC >a* Lw /a Lw >a* LB /a LB > >[We/W*] >[We/W*] > a* LCh /a LCh >a* LT /a LT >a* LP /a LP Home ExportsHome Imports Foreign ImportsForeign Exports

Effects of Change in Relative Wages F Increase in Home wage rate, decrease in Foreign wage rate, or rise in exchange rate (home currency more valuable) F Makes home country goods more expensive, reduces the number of goods exported by the home country. ClothWine Relative Wages BreadCheeseToolsPots a* LC /a LC > a* Lw /a Lw [We/W*] >[We/W*] > a* LB /a LB > a* LCh /a LCh > a* LT /a LT >a* LP /a LP Home ExportsHome Imports Foreign ImportsForeign Exports

Determining the Relative Wage Relative Quantity of Labor L/L* Relative Wage, We/W* Wine Bread Cheese Tools RD RD = Relative Derived Demand for labor RS RS = Relative Supply of labor, L/L* (We/W*) eq Cloth a* LC /a LC