You have two countries, A and B, two factors of production, L and K, and two commodities, X and Y. A is labor-abundant, B is capital-abundant, X is labor-intensive, Y is capital intensive, and the tastes in the two countries are identical.
(a) Draw the production possibilities frontiers, the community indifference curves of the two countries in autarky and in international trade equilibrium.
(b) Explain the problems involved in using the individual indifference curves as community indifference curve and under what conditions we can use them.
You have two countries, A and B, two factors of production, L and K, and two commodities, X and Y. A is labor-abundant, B is capital-abundant, X is labor-intensive, Y is capital intensive, and the tastes in the two countries are identical.
(a) Draw the production possibilities frontiers, the community indifference curves of the two countries in autarky and in international trade equilibrium.
(b) Explain the problems involved in using the individual indifference curves as community indifference curve and under what conditions we can use them.
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Draw the graph carefully. Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.
Consider the following data on the factor endowments of two countries A and B:
| Ā |
Countries |
|
|
Factor Endowments |
A |
B |
|
Labor force: L |
100 workers |
50 workers |
|
Capital Stock: K |
60 machines |
10 machines |
a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).
b. Supposing that cars are capital intensive relative to shoes, which country will have a comparative advantage in the production of cars? Of shoes? Explain.
c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.
d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.
