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2. Suppose country X produces two goods- computer (capital intensive) and shoes (labor intensive). The diagram shows country
a. Label the two axes in the diagram. b. Then draw: - the relative price lines before and after trade, - two indifference cur
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Answer #1

Since X is capital abundant, it will produce more of computers (Capital intensive good) after trade, and less of shoes (labour intensive). Y will do the exact opposite.

In the figure attached, X-Axis measures output of shoes, Y-Axis: Output of computers. PA is the relative price in autarky (before trade) and PT is the relative price after trade. The price lines are tangential to the respective points of production (A in Autarky and B during Trade). Clearly, Price of computers increase after trade, so the capital owners are better off, while the labour owners are worse off.

IC0 is the initial Indifference Curve tangential to PA at A (the consumption must be on the PPF in Autarky). IC1 is the IC after trade. It is above the initial IC, is tangential to PT, and is above the PPC because there is a possiblity to consume more of a good than the country can produce, due to trade. Therefore, the consumption bundle shifts from A to A'.

Output of computers ICI -ICO Output of shoes

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