Germany is capital abundant and Hungary is labor abundant. Bicycles are labor intensive and automobiles are capital intensive.

a. Prior to trading which country has higher wages?

b. What does this imply in terms of the relative prices of bicycles and automobiles?

c. Draw the production possibilities frontiers (PPF) for Hungary and Germany assuming that they only produce bicycles and automobiles (put bicycles on the horizontal axis). Draw both PPFs on the same graph.

d. Now assume that both nations have the same preferences. What can you tell about the autarky prices for bicycles and automobiles in these two nations?

e. Which nation has a comparative advantage in automobiles?

f. Illustrate how they specialize and trade. Show that their new consumption points are on a higher satisfaction level.

Now let's suppose that a large number of workers from Hungary migrate to Germany and the capital to labor ratios in two countries become equal.

g. redo part c through e according to the new scenario.

h. For the new scenario list three assumptions that need to be changed (except the equal capital to labor ratios) for these two nations trade. Illustrate one of these assumption changes on a graph and show the pattern of trade.