Question: Consider the following model of trade between Home and Foreign. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: Tables and Chairs. Consumers always spend two fifths of their income on chairs and the remainder on tables. The only factor of production is labour. Each home country worker can produce 1 table or 4 chairs per unit of time, while each foreign worker can produce 2 tables or 2 chairs per unit of time. There are 20 workers in Home and 30 in Foreign.

(a) Derive the relative demand curve relating the relative demand for tables to the relative price of tables. Do this algebraically, and then show what the curve looks like in a diagram (put the relative price of tables on the vertical axis and the relative quantity of tables on the horizontal axis).

(b) Derive the world relative supply curve of tables.

c) Put in the same figure the relative demand curve for tables that you found in part (a) and the world relative supply curve of tables that you found in part (b). Determine the equilibrium relative price of tables and the equilibrium relative quantity of tables under free trade.

(d) Under free trade, which country produces which good(s)? How many units?

(e) Who gains from trade? Who loses from trade? State labours' stance towards free trade in each country.