Q2. Suppose that there are two countries (A and B) and two goods (a labor-intensive good X, textile, and a capital-intensive good Y, electronics). The two countries have identical demand for the two goods but different labor and capital endowments. Suppose (Px/Py)A < (Px/Py)B in autarky. Identify the capital-abundant country and the labor-abundant country, respectively.Use a PPF-indifference-curve graph to identify the autarky equilibrium for country B.In the same graph, show country B's gains from trade when the two countries trade at a level of Px/Py that is between the two countries' autarky price ratios.In the above graph, identify the trade triangle (including export and import quantities) for country B.What would be the effect of trade on country B's relative nominal wage rate, i.e., the ratio of nominal wage rate relative to nominal capital rental rate (w/r)? Illustrate your answer graphically. Your answer:

Answered: Suppose that there are two countries (A…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q2. Suppose that there are two countries (A and B) and two goods (a labor-intensive good X, textile, and a capital-intensive good Y, electronics). The two countries have identical demand for the two goods but different labor and capital endowments. Suppose (Px/Py)_A < (Px/Py)_B in autarky.

Identify the capital-abundant country and the labor-abundant country, respectively.
Use a PPF-indifference-curve graph to identify the autarky equilibrium for country B.
In the same graph, show country B's gains from trade when the two countries trade at a level of Px/Py that is between the two countries' autarky price ratios.
In the above graph, identify the trade triangle (including export and import quantities) for country B.
What would be the effect of trade on country B's relative nominal wage rate, i.e., the ratio of nominal wage rate relative to nominal capital rental rate (w/r)? Illustrate your answer graphically.

Your answer:

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