Assume two countries, Home and Foreign, with two factors of production, capital and labour, used to produce two goods, rice and cloth. Technology is the same in two countries. Cloth production is labour intensive; Foreign is capital abundant. Suppose that Home is large, while Foreign is small.

a. (5 marks) Suppose Home imposes a tariff on its imports, following an optimal tariff schedule, and Foreign counters by applying an export subsidy, so that in the end, relative prices in Foreign are unchanged. What happens to the terms of trade and the overall welfare of the two countries? Explain your answer, using a relative demand-relative supply curve graph to support your answer.

b. (6 marks) Explain out of each country's producers, consumers, and the government, who win/lose from both the tariff and the subsidy from both countries.

c. (2 marks) Given your answer in part (b), why does Foreign imposes the export subsidy?

d. (2 marks) Instead of an export subsidy, what can Foreign do to counter Home's action and keep its overall welfare as close to the level before Home imposes the tariff as possible?

ASAP PLEASE