2. Assume an economy engaged in trade with the rest of the world. There are two sectors, food and...

Question

2. Assume an economy engaged in trade with the rest of the world. There are two sectors,
food and clothing, and two factors of production, labour and capital. Given that food is
more labour intensive than textiles and this economy is relatively well endowed with
labour, answer the following questions:
a. On a diagram show the free trade equili
ium of this economy with the rest of the world
given that it is a net exporter of food. (10 marks)
The economy is labor intensive that skews its PPF (E) in the direction of food production, the
labor intensive good.
C* is the consumption point of the economy .The tangent line at P* represents the income line or
the budget line. The slope of the income line is the free trade price ration ( Pf/Pc) FT.
Consumption occurs at point C* where aggregate indifference curve is tangent to the price line.
Since they face the same price ratio at the free trade, consumption points for both the economy
and rest of the world lie along the ray from the origin.
EXf*
IMc* P*
C*
I*FT
C
P
IFT
Food
Clothing
PPR(RW)...

David · Accepted Answer

2. Assume an economy engaged in trade with the rest of the world. There are two sectors, 
food and clothing, and two factors of production, labour and capital. Given that food is 
more labour intensive than textiles and this economy is relatively well endowed with 
labour, answer the following questions: 
a. On a diagram show the free trade equilibrium of this economy with the rest of the world 
given that it is a net exporter of food. (10 marks)
The economy is labor intensive that skews its PPF (E) in the direction of food production, the 
labor intensive good. 
C* is the consumption point of the economy .The tangent line at P* represents the income line or 
the budget line. The slope of the income line is the free trade price ration ( Pf/Pc) FT. 
Consumption occurs at point C* where aggregate  indifference curve is tangent to the price line. 
Since they face the same price ratio at the free trade, consumption points for both the economy 
and rest of the world lie along the ray from the origin.

2. Assume an economy engaged in trade with the rest of the world. There are two sectors, food and clothing, and two factors of production, labour and capital. Given that food is more labour intensive...

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