Question

Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.

Consider the following data on the factor endowments of two countries A and B:


Countries
Factor Endowments
A
B
Labor force: L
100 workers
50 workers
Capital Stock: K
60 machines
10 machines
a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).

b. Supposing that cars are capital intensive relative to shoes, which country will have comparative advantage in the production of cars? Of shoes? Explain.

c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.

d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.