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Q1) The following table shows the amount of textile and auto one unit of labor can produce in Mexico and the United States

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Q1) The following table shows the amount of textile and auto one unit of labor can produce in Mexico and the United States.

	Textile	Auto
Mexico	20	2
United States	16	4

 

1. Suppose Mexico has 1,000 labor units available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for Mexico.
2. Suppose the international price is set at 1 auto:8 textile and Mexico decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities.
3. For each unit of its import good, how much is Mexico’ gain (measured in terms of the other good)?
4. At what level of international price ratio will all the benefits from trade accrue to Mexico?
5. Use the above graph to show Mexico’s total gains from trade in this case.

Your answer:

 

Q4.  Suppose a capital-abundant country A (such as the U.K.) is in a trade equilibrium with a labor-abundant country B (such as Vietnam) where country B has a tariff in place. Suppose country B now decides to remove the tariff.

1. Use production-possibilities frontier (PPF) and indifference curves to show the effect of the tariff removal on country B’s trade triangle and gains from trade.
2. Use a graph to illustrate how the tariff removal may affect country B’s income inequality.
3. Discussion: which assumption(s) in the Heckscher-Ohlin model may lead to potential discrepancies between theoretical predictions and real world effects?

 

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