1. Assume Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (automobiles) to Norway. Illustrate (graphically) the gains from trade between the two countries using the standard trade model, assuming first that tastes for the goods are the same in both countries, but that the production possibility frontiers differ: Norway has a long coast that borders on the north Atlantic, making it relatively more productive in fishing. Sweden has a greater endowment of capital, making it relatively more productive in automobiles. 2. In the trade scenario in problem 1, due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway and an increase in the relative world price for fish, PaPf. a. Show graphically how the overfishing problem can result in a decline in welfare for Norway. b. Also show graphically how it is possible that the overfishing problem could result in an increase in welfare for Norway. 3. Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze (graphically and in brief words) the impact on Japan's terms of trade of the following events: a. A war in the Middle East disrupts oil supply. b. Korea develops the ability to produce automobiles that it can sell in Canada and the United States. c. U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants. d. A harvest failure in Russia. e. A reduction in Japan's tariffs on imported beef and citrus fruit. 4. The Internet has allowed for increased trade in services such as programming and technical support, a development that has lowered the prices of such services relative to those of manufactured goods. India in particular has been recently viewed as an "exporter" of technology-based services, an area in which the United States had been a major exporter. Using manufacturing and services as tradable goods, create a standard trade model for the U.S. and Indian economies that shows how relative price declines in exportable services that lead to the "outsourcing" of services can reduce welfare in the United States and increase welfare in India. 5. Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is the same in the two countries. X is capital-intensive; A is capitalabundant. Analyze the effects on the terms of trade and on the two countries' welfare of the following: a. An increase in A's capital stock. b. An increase in A's labor supply. c. An increase in B's capital stock. d. An increase in B's labor supply. 1. Assume Norway and Sweden trade with each other, with Norway exporting fish to Sweden, and Sweden exporting Volvos (automobiles) to Norway. Illustrate (graphically) the gains from trade between the two countries using the standard trade model, assuming first that tastes for the goods are the same in both countries, but that the production possibility frontiers differ: Norway has a long coast that borders on the north Atlantic, making it relatively more productive in fishing. Sweden has a greater endowment of capital, making it relatively more productive in automobiles. 2. In the trade scenario in problem 1, due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway and an increase in the relative world price for fish, PaPf. a. Show graphically how the overfishing problem can result in a decline in welfare for Norway. b. Also show graphically how it is possible that the overfishing problem could result in an increase in welfare for Norway. 3. Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze (graphically and in brief words) the impact on Japan's terms of trade of the following events: a. A war in the Middle East disrupts oil supply. b. Korea develops the ability to produce automobiles that it can sell in Canada and the United States. c. U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants. d. A harvest failure in Russia. e. A reduction in Japan's tariffs on imported beef and citrus fruit. 4. The Internet has allowed for increased trade in services such as programming and technical support, a development that has lowered the prices of such services relative to those of manufactured goods. India in particular has been recently viewed as an "exporter" of technology-based services, an area in which the United States had been a major exporter. Using manufacturing and services as tradable goods, create a standard trade model for the U.S. and Indian economies that shows how relative price declines in exportable services that lead to the "outsourcing" of services can reduce welfare in the United States and increase welfare in India. 5. Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is the same in the two countries. X is capital-intensive; A is capitalabundant. Analyze the effects on the terms of trade and on the two countries' welfare of the following: a. An increase in A's capital stock. b. An increase in A's labor supply. c. An increase in B's capital stock. d. An increase in B's labor supply