1. Textiles are labor intensive and Computers are capital intensive. a) Based on

Question

1. Textiles are labor intensive and Computers are capital intensive.

a) Based on the ppfs in Figure 4.3, which nation is relatively capital abundant?

b) Does the nation you chose in part a) necessarily have more capital?

2. Use the ppf for Nation 1 in Figure 4.3 and community indifference curves to show the following.

a) A likely equilibrium in autarchy. Label it A.

b) A likely production point after trade. Label it P.

c) A likely consumption point after trade. Label it C.

d) Exports. Show the distance.

e) Imports. Show the distance.

3. In answering Question 2, what did you implicitly assume about employment before and after trade?

4. a) For which nation in Figure 4.3 is w/r higher before trade?

b) How will trade affect w/r in Nation 2?

c) Will laborers gain or lose in Nation 2?

Explanation / Answer

que 1 part(a) Relatively Nation 2 is more capital abundant than Nation1 as is visible from the shape of the PPF because the oppurtunity cost of producing computers is less in Nation 2.

         part(b) No, nation 2 does not necessarily have more capital. Infact nation 1 has more capital than nation 2. Assuming that both nations have same technology to produce computers and capital is homogeneous, when both nations produce zero quantity of textiles, Nation 1 can produce more computers than Nation 2.

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