2.

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

X

= f(L, K) X = f(L, K)Y

= g(L, T) Y = g(L, T)

K

= 10, T = 15 K

= 10, T = 20

L

= L + L = 10 L = L + L = 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 to 15. Describe the impact on the free trade price, the pattern of

trade and gains from trade in the short run versus the long run. (15pts)

d)

Assume the original data but consider foreign direct investment in the foreign

country such that KF=20. Describe the impact on the free trade price, the

pattern of trade and gains from trade in the short run versus the long run. (15pts)10