1.Consider 2 countries that each produce two goods X and Y defined as follows. Assume the identical technologies across countries where X is K intensive and Y is L intensive.

HOME FOREIGN

XH=f(Lx,KH) XF=f(Lx,KF)

YH=g(LY,TH) YH=g(LY,TF)

KH=10,TH=15 KF=10, TF=20

LH=LX+LY=10 LH=LX+LY=10

a.Describe the autarky equilibrium in each country.(10pts)

b.Describe the short run pattern of trade between these two countries. In particular, what happens to the short run returns to K, T and L in each country? What will happen in the long run?(20pts)

c.Suppose that the home country experiences immigration such that its labour supply increases 15. Describe the impact on the free trade price, the pattern of tradeandgainsfromtradeintheshortrunversusthelongrun.(20pts)

d.Assume the original data but consider foreign direct investment in the foreigncountry such that KF=20. Describe the impact on the free trade price, thepattern of trade and gains from trade in the short run versus the long run. (20pts)