Question

Countries A and B have two factors of production, capital, and labor, with which they can produce two goods X and Y. Technology is the same in the two countries. X is capital intensive; A is capital abundant. Analyze the effect on the terms of trade and on the two counties' welfare (including factor payments) of the following:

1. An increase in A's capital stock

2. An increase in A's labor supply

3. An increase in B's capital stock

4. An increase in B's labor supply