9. Answer ALL parts of this question. Consider the standard trade model with two goods and two factors, labour and capital. (a) Suppose that a country experiences an increase in its labour force. Assume that good X is labour intensive and good Y is capital intensive. How would the production possibility frontier change as a result? Illustrate this with a simple diagram. (b) What does it mean for the “terms of trade” to improve and why might this matter in terms of welfare? (c) Consider two countries: Home and Foreign. Each country produces two goods, cloth (C) and food (F). Assume Home is an exporter of cloth. Now suppose Home imposes a 20 percent tariff on the value of food imports. What will be the effect of the food tariff on the relative price of cloth and terms of trade? Illustrate your answer with a relevant diagram. You may assume that Home is large enough to affect the world market.
9. Answer ALL parts of this question.
Consider the standard trade model with two goods and two factors, labour and capital.
(a) Suppose that a country experiences an increase in its labour force. Assume that
good X is labour intensive and good Y is capital intensive. How would the
production possibility frontier change as a result? Illustrate this with a simple
diagram.
(b) What does it mean for the “terms of trade” to improve and why might this matter in
terms of welfare?
(c) Consider two countries: Home and Foreign. Each country produces two goods,
cloth (C) and food (F). Assume Home is an exporter of cloth. Now suppose Home
imposes a 20 percent tariff on the value of food imports. What will be the effect of
the food tariff on the relative price of cloth and terms of trade? Illustrate your
answer with a relevant diagram. You may assume that Home is large enough to
affect the world market.
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