Suppose Ireland and Canada produce two goods. Good Y is labor intensive and Good X is...

Suppose Ireland and Canada produce two goods. Good Y is labor intensive and Good X is capital intensive

a. Given the above PPFs, which country is relatively labor-abundant? Capital-abundant? Which good will Ireland export? What about Canada? Explain.

b. Suppose the countries have identical preferences. Show the no-trade equilibrium and the free-trade equilibrium. Be sure to explain the production and consumption label points for both economies.

c. Compare the relative factor prices in the two countries before and after trade, using the stopler samueslon theorem

d. Comment on the overall welfare of each country.

Solutions

Expert Solution

(A) Answer: Canada is capital-abundant whereasIreland is labor-abundant because Canada’sPPF is biased toward the capital-intensivegood whereas Ireland’s PPF is biased towardthe labor-intensive good

(B) Answer:See the following figures in whichthe no-trade equilibrium is denoted by pointA.The production and consumption pointswith trade are respectively by b and c (c) Answer:The Stolper-Samuelson theorempredicts that capital will experience an increasein real earnings in Canada due to the increasein the relative price of good X when the twocountries trade. The situation would be re-versed in Ireland, where the relative price ofgood X will decrease relative to its no-tradeequilibrium price so that capital prices will de-crease although wages will increase.

(D) Answer:Although the factor not in abun-dance in each country will experience a losswhen the two countries trade, overall bothcountries are better off with internationaltrade because they are able to consume outsidetheir production posibilities frontier

Rahul Sunny answered 1 year ago

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