7.Currently countries such as the United Kingdom (UK) and United States of America (USA) are reconsidering where resources should be allocated within their borders and also their trading relationships with other countries. These decisions are being incorporated into industrial strategies and relationships with others, such as the European Union (EU) and members of the North American Free Trade Association (NFTA). In order to make these decisions correctly it is important to account for the implications of these choices according to economic theory. Assume that your country has just two goods, food and clothes, and only two inputs, labour and capital.

a)With the use of an Edgeworth box diagram assess how labour and capital should be distributed within an economy to achieve efficient production of the two goods (food and clothes) and the consequences of imposing other allocations on the industries.

(60 percent of marks)

b)Using an appropriate diagram, analyse the ramifications for the welfare of a country's citizens if it chooses to close its borders to trade compared to that where international trade is allowed. Within your answer make sure you carefully explain how the diagram used to answer this part of the question relates to that used in part (a).