Problem 5. (Standard trade model) Assume two countries Wawa and Pawa with two factors of production:...

Problem 5. (Standard trade model)

Assume two countries Wawa and Pawa with two factors of production: capital and labour. Each country produces two goods: books and widgets. Books are capital intensive. Wawa is capital abundant. Assume the same technology in both countries.

Explain the effects of an increase in a) capital stock and b) labour supply in each country.

Expert Solution

Answer : (i)- An increase in Wawa's capital stock favors production of Books.

(ii)- An increase in Pawa's capital stock favors production of Books.

(iii)- An increase in Wawa's labor supply favors production of widgets.

(iv)- An increase in Pawa's labor supply favors production of widgets.

Explanation :-

Rahul Sunny answered 2 years ago

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