2) (35 points) Suppose that there are two countries; Country 1 and Country 2. Country 1...

 

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2) (35 points) Suppose that there are two countries; Country 1 and Country 2. Country 1 is capital abundant and country 2 is labor abundant. X is capital intensive and Y is labor intensive. Assume that Country 1 is a large country and country 2 is a small country. Answer the following questions: a) Suppose that Country I's capital stock increases. Show the pregrowth and after growth production and consumption points on a figure. Clearly explain how the production and consumption of commodity X and Y would change after growth. b) What happens to the terms of trade of Country 1, terms of trade of Country 2, welfare of country 1 and country 2 when Country 1's capital stock increases? c) Now, suppose that Country 2's labor supply increases. (You start from the original question) Show the pregrowth and after growth production and consumption points on a figure. Clearly explain how the production and consumption of commodity X and Y would change after growth if we assume that both X and Y are normal goods. 2) (35 points) Suppose that there are two countries; Country 1 and Country 2. Country 1 is capital abundant and country 2 is labor abundant. X is capital intensive and Y is labor intensive. Assume that Country 1 is a large country and country 2 is a small country. Answer the following questions: a) Suppose that Country I's capital stock increases. Show the pregrowth and after growth production and consumption points on a figure. Clearly explain how the production and consumption of commodity X and Y would change after growth. b) What happens to the terms of trade of Country 1, terms of trade of Country 2, welfare of country 1 and country 2 when Country 1's capital stock increases? c) Now, suppose that Country 2's labor supply increases. (You start from the original question) Show the pregrowth and after growth production and consumption points on a figure. Clearly explain how the production and consumption of commodity X and Y would change after growth if we assume that both X and Y are normal goods.

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A Suppose country 1s capital stock increases country will specialise in the production of commodity ... View the full answer