Let us assume a 2x2x2 model (country H & F, good A & B, factors L & K).

The two countries are identical except L < L* and K > K*

More over good A is labor intensive and good B is capital intensive.

(a) Draw the production possibility frontier of the two countries. (You need to measure A on the horizontal axis).

(b) Using factor prices w & r, commodity prices Pa & Pb, derive the relation between the pre trade relative price ratios of good A in H and F. (Correct version: Suppose the relative demand for A is identical in both countries. Using indifference curves for preference, derive the autarky relative price of A in H and F. Using appropriate diagram show the autarky factor price ratio in H and F)) Show the autarky prices using a graph with world relative supply and relative demands and show the direction of trade.