Question 1 Consider the standard trade model with two goods and two factors, labour and capital. (a) Suppose that a country experiences an increase in its capital stock. How would the production possibility frontier change as a result? Illustrate this with a simple twogood diagram. (B) Consider two countries: Home and Foreign. Each country produces two goods, cloth (C) and food (F). Assume Home is an exporter of cloth. Assume also that Home is a large country. 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.
Question 1
Consider the standard trade model with two goods and two factors, labour and capital.
(a) Suppose that a country experiences an increase in its capital stock. How would the
production possibility frontier change as a result? Illustrate this with a simple twogood diagram.
(B) Consider two countries: Home and Foreign. Each country produces two goods, cloth (C) and food (F). Assume Home is an exporter of cloth. Assume also that Home is a large country.
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
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Factor
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Cigars
(100 boxes)
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Soybeans
(100 bushels)
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Acres of land (T)
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TC=
0.2 |
TS=
0.8 |
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Hours of labor (L)
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LC=
0.4 |
LS=
0.4 |
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TC
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=
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the number of acres of land used to produce 100 boxes of cigars.
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LC
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=
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the number of labor hours used to produce 100 boxes of cigars.
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TS
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=
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the number of acres of land used to produce 100 bushels of soybeans.
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LS
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=
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the number of labor hours used to produce 100 bushels of soybeans.
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