2. Australia is land abundant and India is labor abundant. Wheat is land intensive relative to textiles. Use a model of a two-factor economy and graphically demonstrate the pre-trade and post-trade equilibria between these two countries. Which factors gain and which factors lose when trade arises between these two countries? Explain carefully.
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Two-Factor Economy Model: In a two-factor economy model, we assume that there are two factors of production, such as labor and capital. Each country has a different endowment of these factors, which determines their comparative advantage in producing different Show more…
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Texts: Question 2 Suppose that 2 hours of labor and 2 units of capital are required to produce 1 yard of cloth in Australia, while 1 hour of labor and 3 units of capital are required to produce 1 pound of food in Australia. Australia has a total of 2,000 labor and 3,000 capital. What is Australia's labor constraint? (2 marks) What is Australia's capital constraint? (2 marks) What production bundle fully employs both factors (labor and capital)? (4 marks) Plot the labor and capital constraints to derive the production possibility frontier (PPF) for the Australian market and show the point where the production bundle fully employs both factors of production. Clearly label the axes and the lines. (10 marks) Which product is labor-intensive? Why? (4 marks) Suppose that the United States (a foreign country that trades with Australia) has a total of 4,000 labor and 2,000 capital. Which country is relatively labor abundant? Why?
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Consider the following Ricardian model with 2 countries and 2 goods: The table below provides information on the size of countries labor force and their productivity in producing each good. India | China 60 workers | 350 workers Labor Supply Juice | Tea India: 4 workers | 2 workers China: 7 workers | 5 workers What is the pattern of trade? Explain What is the maximum free trade price of tea in terms of juice for free trade to be profitable? Explain.
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Use the following information to work. With free trade between Australia and the United States, Australia would export beef to the United States. But the United States imposes an import quota on Australian beef. Explain how this quota influences the price that U.S. consumers pay for beef, the quantity of beef produced in the United States, and the U.S. and the Australian gains from trade.
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