Q1. Assume that a country produces two goods, agriculture (which requires land and labor) and manufactured goods (which requires labor and capital), and is currently in autarky equilibrium. The country just finds that the international price ratio of agriculture relative to manufactured goods, i.e., PA/PM, in the world market is higher than the price ratio in its domestic market.Should this country trade? If so, which product should it export?Will it gain from trade? Illustrate your answer graphically using production-possibilities frontier (PPF) and indifference curves. In the same graph, identify the trade triangle, including export and import quantities.How will the size of the trade triangle, i.e., the levels of export and import quantities, in the above question change when PA falls in the world market? Illustrate your answer graphically.How will the nominal wage rate in this country be affected by trade? What about real wages? Illustrate your answer graphically. Your answer:

Heckscher-Ohlin theory in international trade is a model that explains how a country with an…

Answered: Q1. Assume that a country produces two…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter18: Gaining From International Trade

Section: Chapter Questions

Problem 4CQ

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Q1. Assume that a country produces two goods, agriculture (which requires land and labor) and manufactured goods (which requires labor and capital), and is currently in autarky equilibrium. The country just finds that the international price ratio of agriculture relative to manufactured goods, i.e., P_A/P_M, in the world market is higher than the price ratio in its domestic market.

Should this country trade? If so, which product should it export?
Will it gain from trade? Illustrate your answer graphically using production-possibilities frontier (PPF) and indifference curves. In the same graph, identify the trade triangle, including export and import quantities.
How will the size of the trade triangle, i.e., the levels of export and import quantities, in the above question change when P_A falls in the world market? Illustrate your answer graphically.
How will the nominal wage rate in this country be affected by trade? What about real wages? Illustrate your answer graphically.

Your answer:

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