2. There are two countries: A and B; and each country produces two goods: X and Y. The relative price of goods can be expressed as pypx or equivalently pxpy. The following two conditions apply: endowments: (LK)A>(LK)B factor intensities: (LK)X>(LK)Y where K and L are factor endowments of capital and labour. Capital earns return r and labour earns wage w. Assume the countries initially do not trade with each other, and both countries produce both goods X and Y for domestic consumption only. Then they begin trading. Explain the following changes due to trade for each country, using fully-labeled diagrams. You must show diagrams for each country. a. Illustrate each country's PPF without trade, and show a possible non-trade equilibrium for each country by drawing in reasonable utility functions. b. Illustrate the impact of trade for each country on the change in the relative price line, and identify the gains from trade. You may modify the diagram in part a. or provide a new diagram. c. Illustrate in the diagram above the shift in production and consumption from no trade to trade. Explicitly identify on the diagram the quantities imported and exported for each country with trade (no numbers, just show the amounts on the diagram). d. Illustrate in a diagram of factor supply and demand the change in relative demand for factors and the shift in the equilibrium factor returns for each country. e. Summarize effects of trade: what does each country specialize in producing? Which factor gains and which factor loses in each country? 2. There are two countries: A and B; and each country produces two goods: X and Y. The relative price of goods can be expressed as pypx or equivalently pxpy. The following two conditions apply: endowments: (LK)A>(LK)B factor intensities: (LK)X>(LK)Y where K and L are factor endowments of capital and labour. Capital earns return r and labour earns wage w. Assume the countries initially do not trade with each other, and both countries produce both goods X and Y for domestic consumption only. Then they begin trading. Explain the following changes due to trade for each country, using fully-labeled diagrams. You must show diagrams for each country. a. Illustrate each country's PPF without trade, and show a possible non-trade equilibrium for each country by drawing in reasonable utility functions. b. Illustrate the impact of trade for each country on the change in the relative price line, and identify the gains from trade. You may modify the diagram in part a. or provide a new diagram. c. Illustrate in the diagram above the shift in production and consumption from no trade to trade. Explicitly identify on the diagram the quantities imported and exported for each country with trade (no numbers, just show the amounts on the diagram). d. Illustrate in a diagram of factor supply and demand the change in relative demand for factors and the shift in the equilibrium factor returns for each country. e. Summarize effects of trade: what does each country specialize in producing? Which factor gains and which factor loses in each country