Suppose two countries, H and F, are in international general equilibrium at some

Question

Suppose two countries, H and F, are in international general equilibrium at some price ratio P*-Px/Py. They produce two goods, X and Y, using two factors of production, L and K. Y is capital- intensive, X is labor-intensive. The two countries have identical preferences for the goods. H exports Y and imports X, but it does not completely specialize. All other conditions of the "Workhorse" Model developed in lecture apply in this situation. ) Which country has the higher autarky price ratio Px/Py? How do you know? b) Sketch graphs for each country consistent with the above information. Include the PPFs, some representative indifference curves and clearly indicate production/consumption levels of good X (you can ignore Y) at the general equilibrium price P*. Try to make the exports/imports balance graphically, but given the time constraint of the exam that may not be possible. [Hint: The shapes of the indifference curves will need to be different between the two countries. Use the fact that each country is specializing in a different good to guide you in how these PPFs must look. c) Sketch the excess demand/supply curves for good X. Indicate the general equilibrium price P* Suddenly, H experiences a plague, sickening workers and reducing the labor available. The level of capital remains constant. d) What happens to H's PPF? Be specific. [Hint: is the changing position of the PPF biased one way or the other?] Sketch this graph on the same picture that what you made for part b e) How does H's excess demand curve change as a result of the plague? Sketch in this graph on what you did for part c. Identify the new general equilibrium price. [Hint: you will probably want to utilize your graph from d to help you figure this out.] f Does F experience an increase or decrease in welfare as a result of the plague in H? Briefly state why.

Explanation / Answer

1). Ans= The country H has higest autarky price the reason of this statement is the price of the goods which exported by country F is inferior than the price of goods exported by country H. this diffrence and inferior will cause to lead to reduce the price of good in country F and the price of good in ciuntry H will be higher.

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