Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions described in problems 2 and 3. Initially, both countries have the same supply of labor (100 units each), capital, and land. The capital stock in Home then grows. This change shifts out both the production curve for good 1 as a function of labor employed (described in problem 2) and the associated marginal product of labor curve (described in problem 3). Nothing happens to the production and marginal product curves for good 2.

a. Show how the increase in the supply of capital for Home affects its production possibility frontier.

b. On the same graph, draw the relative supply curve for both the Home and the foreign economy.

c. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)?

d. Describe how opening up to trade affects all three factors (labor, capital, land) in both countries.