Parts a and b in the attached image please 4. Consider a world that consists of two countries, Australia and New Zealand. Both countries produce and consume twogoods, wool and mutton. Technologies in both countries are as follows:Wool ProductionMutton ProductionLabour input requiredCapital input requiredFactor endowments are as follows:AustraliaNew ZealandLabour4504501000Capital900NOTE: no calculations are required in this question!a. In one K-L space graph and using the Hecksher-Ohlin (HO) assumption of variable K-L ratios, produceisoquant and isocost curves for Australia and NZ in autarky. Show a common isoquant for mutton and then show twoisoquants for wool. Use this graph to deduce which country has the lower autarky rel P of wool. Explain.b. If Australia and New Zealand trade with each other, what will the pattern of trade be? Why (i.e. whattheorem)? In one graph with wool output on the horizontal axis, show both countries' PPFS and show each country'scomplete eqm in both autarky and FT. Be sure to indicate both countries' X and M under FT.c. Who in Australia would oppose the onening of free trade? WhY? Who in 0 uctrolio

Answered: 4. Consider a world that consists of…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter3: Interdependence And The Gains From Trade

Section: Chapter Questions

Problem 5PA

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Parts a and b in the attached image please

4. Consider a world that consists of two countries, Australia and New Zealand. Both countries produce and consume two
goods, wool and mutton. Technologies in both countries are as follows:
Wool Production
Mutton Production
Labour input required
Capital input required
Factor endowments are as follows:
Australia
New Zealand
Labour
450
450
1000
Capital
900
NOTE: no calculations are required in this question!
a. In one K-L space graph and using the Hecksher-Ohlin (HO) assumption of variable K-L ratios, produce
isoquant and isocost curves for Australia and NZ in autarky. Show a common isoquant for mutton and then show two
isoquants for wool. Use this graph to deduce which country has the lower autarky rel P of wool. Explain.
b. If Australia and New Zealand trade with each other, what will the pattern of trade be? Why (i.e. what
theorem)? In one graph with wool output on the horizontal axis, show both countries' PPFS and show each country's
complete eqm in both autarky and FT. Be sure to indicate both countries' X and M under FT.
c. Who in Australia would oppose the onening of free trade? WhY? Who in 0 uctrolio

Expert Solution

Introduction

The Hecksher-Ohlin (HO) theory takes into account two countries, two commodities, and two factors (labour and capital). It is an undeniable reality that different countries have different endowments or availability of variables. There may be an abundance of capital in country A, yet labour may be limited. On the other hand, Country N may have an excess of labour. If and only if, a country is considered to be comparably capital abundant if it has a larger capital-to-labor ratio than the other country.

Given that

	Wool Production	Mutton Production
Labour inputs required	6	3
Capital input required	3	6

Factor endowments

	Country A	Country N
Labour	450	1000
Capital	450	900

It can be seen from the above tables that country N is relatively both capital abundant and Labour abundant

Capital abundant condition

$\frac{K_{N}}{L_{N}} > \frac{K_{A}}{L_{A}}$

Labour abundant condition

$\frac{L_{N}}{K_{N}} > \frac{L_{A}}{K_{A}}$

Where the K and L stand for capital and labour, respectively. The letters A and N stand for the countries A and N, respectively.

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