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Assume that there are two goods: agricultural (A) and machinery (M), two factors: K and L, two countries Branzia and Gronia. Branzia is L-abundant. A
Assume that there are two goods: agricultural (A) and machinery (M), two factors: K and L, two countries Branzia and Gronia. Branzia is L-abundant. A is L-intensive. M is K-intensive. Initially, PA =1$ and PM=1$ and terms of trade is PA/PM=1. In Branzia, L=10000 and K = 2500. Branzia is a small economy. Explain the effects of the following changes in Branzi's economy. In answers, use the necessary graphical analysis methods. (Hint: Branzia is our home country in this question. Always put the agricultural good in the horizontal axis). a PA/Pm was 1. What happens if PA increases from 19 to 2$? Explain the effects on the economy. (10p) b) PA/PM was 1. What happens if PM increases from 19 to 1.50$? Explain the effects on the economy (10p) c) There is no change in the terms of trade. However, assume that both factors, K and L increase by 10%. Explain the effects on the economy (Hint: Unbiased growth). (5) * Use PPF, CIC curves and V line. Show changes in production and consumption mix equilibria and then in exports and in imports as we did in class. Explain each step. Don't forget answer each part with separate graphs
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