Suppose that the United States and Mexico are the only two countries in the world and that labor is the only productive input. In the United States, a worker can produce 12 bushels of wheat or 2 barrels of oil in a day. In Mexico, a worker can produce 2 bushels of wheat or 4 barrels of oil per day.
a. What will be the price ratio between the two commodities (that is, the price of oil in terms of wheat) in each country if there is no trade?
b. If free trade is allowed and there are no transportation costs, which commodity would the United States import? What about Mexico?
c. In what range would the price ratio have to fall under free trade? Why?
d. Picking one possible post-trade price ratio, show clearly how it is possible for both countries to benefit from free trade.