Question

Based on Hecksher Olin Theory:

A). Draw and explain in a graph the free trade equilibrium for Home Country (Remember PPFs? ! Make sure to clearly indicate the production point, the consumption point, and the quantity of exports and imports). B). In the graph drawn above for question (a), show the effects of a proportional increase in the endowments of labor and capital. Does welfare increase or decrease? C). One of the justifications for import-substitution strategies is the deterioration of terms of trade. This means that the price of exports falls relative to the price of imports. In the graph for question (a), draw and show a graph how this would be represented. Does welfare increase or decrease? D) Suppose that Home country is the main exporter of bananas in the world (meaning it is a large country, able to affect world prices), is it theoretically possible that economic growth decreases welfare for Home Country? Explain using a different graph from answers to questions (b) and (c). Be sure you type your answers and draw clean graphs.

Answer 1