Use the 'Standard Model of Trade " eg the Relative demand-relative supply framework in the...
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Use the 'Standard Model of Trade " eg the Relative demand-relative supply framework in the following. Assume that Land is specific to AG and Capital is Specific to MANU. 1: (10 points) Autarchy versus Free Trade: Suppose Home and Foreign have identical preferences but Home has more Capital (K) than foreign. Otherwise, they have the same labour and capital endowment. (2 points) a) Depict this in the 'standard model of trade' as per class notes. Explain why relative demands and/or relative supplies will differ and how. (2 points) b) Compare prices, production, and consumption in each country in autarchy. Who has the lower relative price of manufacturing (PM/PA) ? Explain why (eg give the intuition). (2 points) c) What happens to prices, production, and consumption in each country when we open to free trade? Who exports AG ? Who exports MANU? Explain. Relate this to changes in (PM/PA) in each country (2 points) d) Do we get Gains from Trade? Who gains? Do some lose? Explain. Give the intuition. (2 points) e) Will Land owners in HOME support free trade? Explain
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