What will be the pattern of trade between two country

Reference no: EM13685321

There are two countries (US, Mexico) producing two goods (Ipads (I), Jeans (J)). Suppose I is relatively capital intensive in production and the Mexico is relatively capital abundant.

1. What will be the pattern of trade between the US and Mexico?

2. Which country has a higher relative price for jeans (J)? Why?

3. What happens to real returns (real wage and real return to capital) after trade in Mexico?

4. Show what the trade equilibrium will look like using the PPFs in (b) for both countries. Label the trade triangle as well as the quantity exported and imported by each country.

5. Suppose that the two countries share the same Indifference Curve, show the autarky equilibrium for both countries in one graph, putting J on the horizontal axis (label Indifference curve, relative price level, quantities)

Reference no: EM13685321

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