Country A is endowed with 18 units of good x and 1 unit of good y, while country B is endowed with 2 units of good x and 7 units of good y. Both countries consume x and y in fixed and equal proportions (e.g., x is a left shoe, y is a right shoe)

a). Construct an Edgeworth box for the two countries.

b). Identify the contract curve.

c). Solve for the free-trade equilibrium relative price.

d). How are the gains from trade allocated across the two countries?

e). What explains the peculiar allocation of the gains from trade across these countries?

f). What is the direction of trade between the two countries. Show that it is balanced.

Answer rating: 100% (QA)

a To construct an Edgeworth box for the two countries we need to plot their initial endowments of goods x and y Country A 18 units of good x and 1 uni... View the full answer