Question

send answers for all from 1-4

4. The production possibility frontiers of nation 1 shown in Fig. nation 1 is labor abundant and export X. PA is the equilibrium price of autarky in nation 1, Pw and Pa are the world prices. (12%) 1) analyze the factor intensity of X and Y, why? 2) what is the advantage of nation 1, why? 3) explain the points of A,B, T, E 4) explain the gains from exchange and specialization. Nation 1 100 E 80 PA 60 40 20 Pe-Pw-1 Pw=1 X 150 110 130 90 70 50 30 C 10 O

Answer 1

• Factor intensity can be used in economics by which factors of production can be compared across industries. Labour is abundant in country 1 and exports X where you exports the labour abundant products. Capital is less in the nation.
• Advantage of nation 1 is labour intensive products which they can produce and export. Given the PPF curve, we have at every point, production of produce X is more than product Y. Product X can be produced with more labour and less capital, that is the reason they are producing more of product X.
• Point is the optimal point if the budget line of the consumer is dashed one. That line is tangent to the PPF curve at point A. Point B is the optimal point if the budget line is the straight line of which point B is. C and D are unattianable as they lie outside the PPF curve.
• The gains from exchange is for nation 1 where they export the products in which they have competitive advantage. The country which imports from nation1 may be a capital intensive firm which imports labour intensive products. Both countries are getting benefit with this and operating at their optimal point.