General Equilibrium MODEL 2DUE:Use the RELATIVE DEMAND RELATIVE SUPPLY framework in the following. Assume that Land is specific to AG and Capital is Specific to MANU.1:BIG and SMALL(ish): Assume Home and Foreign have identical preferences but Home has relatively more Capital (K) than Foreign but proportionally less land (T). Suppose Home is 5 times larger than Foreign.

(2 points) a) Explain how the relative sizes of the two countries determines the equilibrium World Relative Prices (Pm/Pa) and the pattern of trade.

(3 points) b) Show that both countries will Gain from Trade but explain why Foreign gains more. 2:IMPORT TARIFFS: Use the setup in question 1 for the following. (

2 points) a) Suppose Foreign imposes an import tariff on its imported goods from Home. Explain how this changes world relative prices (Pm/Pa). Hint: first determine which sector is imported.

(3 points) b) Explain why Foreign is unlikely to gain much from its tariff. Relate their net gain to the Terms of Trade and the distortions the tariff induces.

(2 points) c) Suppose instead that Home imposes an import tariff on its imported goods from Foreign. Explain how this changes world relative prices (Pm/Pa).

(3 points) d) Explain why Home is also unlikely to gain much from its tariff. Relate their net gain to the Terms of Trade and the distortions the tariff induces.3:BIG and BIG: Use the setup in question 1 but assume Home and Foreign are equal sized.

(2 points) a) Show that Home has a larger Gain from Trade than in question 1. Explain. That is, Home prefers Foreign to be larger.(

3 points) b) Explain why Foreign now has a greater incentive to impose import tariffs given its equal size. Relate their net gain to the Terms of Trade and the distortions the tariff induces.

(5 points) c) What does the above imply about the willingness of big countries to enter a free trade agreements. Explain. That is, why are big countries more willing to have FTAs with other big countries than with small countries?