Question

A depicts production and consumption in a closed economy with labor-intensive Wheat and capital- intensive Cloth. Capital and labor are both perfectly mobile across sectors CHOS model). Read all the questions, think carefully and plan your answer before drawing Cloch Wheat (i.e. the Suppose the country opens to trade and this leads to an increase in domestic relative price of wheat rises to now equal the world relative price of wheat). a) Assume actors in the economy respond to the change in relative prices by moving resources across a dot to represent a new equilibrium free-trade production point on the PPF at world prices. Label it as point B b) Draw the world price line running through point B. This line can also be referred to as the country's GDP line. c) Indicate the level of domestic consumption with a point C and a representative indifference curve. Now label on the axes points Qw and Qc and Cw and Cc d) Indicate the real level of GDP measured in terms of wheat (i.e at world prices production bundle B has the same value as how much Wheat?). Label this point T on the Wheat axis. e) Indicate the level of EXPORTS on the diagram (e.g. with a label like Since Wheat is relatively labor-intensive the increase in the relative price of wheat should lead to changes in the real wage of workers (measured in terms of either cloth or manufacturing sectors) by the following logic: KB MPLy- K, Wher forinstance the sequence 1 would be read as stating that an increase in the relative price of wheat leads to a rise in the wage to rental ratio wlr (which may be right or wrong for this question). o In the boxes above draw in eitherorto indicate how each capital-abor ratio and real wage measure changes (does it go up, down or stay the same).

Answer 1

Clota 4D? Line througe pmduetion anus point and ance Exporlo