I. There are 2 countries, D and F. There are 2 products Shoes and Cheese. Each country has two inputs Labour and Capital. They have identical production functions for both goods. The objective is to be able to determine the gains from trade and be able to explain them simply and clearly. This would include a brief explanation as to why each country specialized in the good it did and how the gains from trade are measured. The use of correct numerical results is essential to this exposition. The questions provided are to guide you. Domestic has the following situation: Foreign has the following situation: Pshoes = 0.1*w + 0.3*r Pshoes = 0.1*w + 0.3*r Pcheese = 0.4*w + 0.3"r Pcheese = 0.4*w + 0.3*r Pshoes = 4 $ P.shoes = 3 $ Pcheese = 75 +1. Initially, the countries operate in autarky - no trade. Complete the table to determine conditions within each country. Autarky Domestic Foreign W*D= W*F= IF = w/r= w/r= (K/L )shoes (K/L )shoes (K/L )Cheese (K/L )Cheese Shoes per w = Shoes per w= Cheese per w = Cheese per w = Shoes per r = Shoes per r = Cheese per r= Cheese per r = Which country Labour Abundant? 3. Which good is Labour Intensive? 4. Which country is likely to export which product? a. Domestic Exports: Shoes Cheese b. Foreign Exports: Shoes Cheese Now, suppose the countries open to trade so that prices in each country for each good become the same. In this case: "Shoes, Domestic = Pshock, Foreign = 3.5 % and Pchouse, Domestic = Pchoose, Foreign = 6.5 $ 5. With free trade, conditions in each country change. Complete the table to determine conditions within each country after they open to trade Trade WD= WF= rD= IF= w/r= w/r= Shoes per w = Shoes per w = Cheese per w = Cheese per w = Shoes per r = Shoes per r = Cheese per r= Cheese per r= One of the concerns with opening to trade is the consequences. There are two groups of concern: Labor and Capital. Calculate what changes each sees.6. Changes (A = difference, i.e, Trade value minus Autarky value, %A = percentage change, i.e, A/Autarky value): Changes due to Trade Domestic Foreign A P shark, D= A P shock, D= A WD= A WF= A ID= A IF= A Shoes per wn= A Shoes per Wp = A Cheese per wp A Cheese per Wp = A Shoes per ID = A Shoes per IF= A Cheese per ro = A Cheese per re = 7. Discuss the gains from trade for L and K in each country