5. Consider two countriesIndia and Japanfacing a forward falling supply curve. Both produce two commoditiescloth and radios.

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5. Consider two countries—India and Japan—facing a forward falling supply curve.

Both produce two commodities—cloth and radios. India, a labor surplus country, produces cloth using cheap labor. This reduces its domestic price in comparison to Japan. Similarly, Japan being technologically advanced produces radios at a lower cost than India. If both are open to trade, ceteris paribus.

a. What will happen to the world market price for cloth and radio?

b. What would you expect of the international trade and who would produce what, if neither India nor Japan has an initial advantage of lower price?

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