Question

Chapter 6, The Standard Model 1. Countries A and B have two factors of production- labour and capital, which have some degree of substitutability. Country A is relatively capital-abundant. They each have the ability to produce two goodsX and Y. Production of X is relatively capital-intensive. Technology and tastes are identical in countries A and a) Draw the PPF's for each country. b) On a single graph, draw the relative supply of good X for each country, as well as the world relative demand. c) What is the pattern of trade?

International trade, The standard model

This is all information given for the question. The PPF has to be drawn with help of the information that A is relatively capital-abundant and that productiok of X is relatively capital intensive.

Answer 1

Country A (good) Country The Standard Model. Two countris Two factors, Two commodities. Where country A is capital abundant and country B is labous abundant Both have the ability (goody) L to produce two goods The figure shows the Production Possibility curves as the countries wherein the PPE of country A is skewed towards the vestical axis denoting that the country is capital abundant and the PPE of country & is skewed towards the horizontal axis denoting that the country is labous abundant, (or less capital abundants x to proa

In a country, The Relative price of goody to good X P / Px The Production will be at a point where the value of its output V=Pygy + P Q x, is maximum. Slope = - (py ) good Production will be at &, where PPE is tangent to the isocest line. goody when the relative Price of good Y relative to good & Py /Px increase the iso cost line becomes skeepes. this shifts the production from point s to 8 Supply by/Qx rises, good vv , P)" RIB) Sfgoody प

Similarly for good & Melanine Relative RS Price fy/ex (Py/Px) (Px P) PxIPyt Relative as goody ogy 10x (@x/87) (93/9y2 Suantity af good x When the relative price of good & relative to good Y PIPy increases, the iso cost line becomes skeeps. This shifts the production point d' to at Supply ax/ Qy dises. The World Demand for good Y relative to good X at each relative price. RO = (Dy + D) / (Dx + DX ) Relative Relative supply and Demand RS (Px/Py) -(Px / Py) RD Relative guantity af good & (8x184)

Pattern af Trade & N The rise in relative price of goody an increase in the relative production of good Y and a fall in relative consumption of the same So, Country B becomes the exporter of good Y and an importes of good X The decrease in the relative price as good Y in foreign leads it to import good Y and export good & same is the case with good x The rise in relative price of good X results in an increase in the relative production as good X and a decrease in the relative consumption of the same. So country A becomes the exporter of good X and an importes as goody The decrease in the relative price of good X a abroad leads it to import good X and export good Y. Na

Country A, which is capital abundant, will export good x and import good y, when an increase in the relative price of good x results in its production being increased and the consumption being decreased. In case of decrease in the relative price of good x abroad, leads it to import good x and export good y.

Kindly Rate the Answer. Thanks.