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2 Heckscher-Ohlin Model [40 points] Suppose 2 countries, Canada and China trade 2 goods with each other: timber and chairs. Without trade, the relative price of timber in Canada is Pr/Py =4 and it is Pj/P5 = 2 in China. Suppose when allowing for trade the world equilibrium price is Py /P = 3 so that Pr _ Py P} > = > PC P(\\:"\\'mld P(i 1. Which good will Canada export and which one China? Why? 2. The following figure shows China's production possibilities frontier (PPF). Add exam- ple indifference curves to the diagram and show which point China would optimally choose in the no-trade case. Output of chairs, Q] China's PPF Output of timber, Q; 3. Suppose without trade, China chose point A* as shown in the following graph. Since trade changes the relative price from 2 to 3, China can now reach any consumption point on the red line with slope -3, if it continues producing at point A*. Will it keep on producing at this point? Why or why not? Show graphically how trade affects China's production of timber and chairs. Label the new quantities that are produced with QF, and QF