Consider an international economy consisting of home and foreign coun- tries. There are two factors: capital (K) and labor (L) and two goods: clothing (C) and food (F): The two countries share the same constant re- turns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual proper- ties. Assume that at autarky both countries produce both goods. All the prices are in terms of units of food. Thus, the price of food is 1: The home country is labor abundant: Here, L and K are home endowments of labor and capital and Land Kare foreign endowments of labor and capital. Assume that food industry is capital intensive and clothing industry is labor intensive. All markets are competitive. (a) Define the following terms: Home country is labor abundant. (b) Draw the relative supply curves of home and foreign countries and the common relative demand curve. Use PC/PF in the vertical axis and QC/QF in the horizontal axis. Explain using the graphs, which country has the higher autarky clothing price (in terms of food)? (c) When the two countries start to trade, which good does the home country export and which good does it import?. Explain your answer using the above graph.
Consider an international economy consisting of home and foreign coun- tries. There are two factors: capital (K) and labor (L) and two goods: clothing (C) and food (F): The two countries share the same constant re- turns to scale production functions. Representative consumers of the two countries share the same homothetic welfare functions with usual proper- ties. Assume that at autarky both countries produce both goods. All the prices are in terms of units of food. Thus, the
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(a) Define the following terms: Home country is labor abundant.
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(b) Draw the relative supply curves of home and foreign countries and
the common relative demand curve. Use PC/PF in the vertical axis and QC/QF in the horizontal axis. Explain using the graphs, which country has the higher autarky clothing price (in terms of food)?
(c) When the two countries start to trade, which good does the home country export and which good does it import?. Explain your answer using the above graph.
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