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6. (a) Assume Indonesia and China are trading partners.Indonesia initially exports palm oil to and...

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Economics

6. (a) Assume Indonesia and China are trading partners.Indonesia initially exports palm oil to and imports lubricants fromChina. Using the standard trade model, explain how an increase inthe relative price of palm oil, in relation to lubricants prices,would affect the production and consumption of palm oil forIndonesia (assuming that taste for both goods is the same in bothcountries). If palm oil's income effect is greater than thesubstitution effect, what would happen to palm oil consumption inIndonesia. [12 marks] b. Countries A and B have two production,capital, and labor factors, with which they produce two goods, Xand Y . Technology is the same in the two countries. X is capitalintensive, and A is capital-abundant. Analyze the effects on theterms of trade and the two countries' welfare of the following: i.An increase in A's capital stock. ii. An increase in A's laborsupply. iii. An increase in B's capital stock. iv. An increase inB's labor supply

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