There are two countries, Home (H). and Foreign (F), and two goods, Automobiles (A) and Baseballs...

There are two countries, Home (H). and Foreign (F), and two goods, Automobiles (A) and Baseballs (B). Assume that H is labor-abundant and that A is capital-intensive.
a. Which country has a comparative advantage in A? What is the trade pattern between the two countries?

b. With A on the horizontal axis, draw the PPF and indifference curve for the H in autarky. Indicate the equilibrium production point and the relative price of A.

Solutions

Expert Solution

a. It is given that A is capital intensive. Thus, the country which has abundant capital will have comparative advantage in it as the opportunity cost will be lesser.

Thus, Foreign (F) will have a comparative advantage in A.

The home country will produce basketballs since it is labor abundant.

Therefore, the Home country will export basketballs to foreign country and import automobiles from foreign country. This will be the trade pattern between both countries.

Rahul Sunny answered 1 year ago

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