Question 1 Suppose there exist 2 countries, Home and Foreign; 2 goods, X and Y; and 2 factors of production, labour (L) and capital (K). Each country can produce both goods. X is labour-intensive and Y is capital-intensive. Home is labour-abundant and Foreign is capital-abundant. Assume that the standard assumptions of the Heckscher-Ohlin model hold. When answering the following question, please support each of your arguments with detailed analysis and draw the relevant diagrams to support your answer. Consider a move from autarky to free trade between the two countries in both goods. Identify which group of people (labor or owners of capital) gain and which lose in Home from the move from autarky to free trade. Discuss clearly how the assumptions of the model lead to this result.

Question 2 Suppose that the assumptions of the Standard Trade Model apply. Consider three countries: X, Y and Z. Consider two goods: A and B. X and Y export A and import B. Z exports B and imports A. Moreover, suppose that country Y (which is a large country) experiences economic growth in its import-competing sector. Explain in detail, using any relevant diagrams, what is the effect of this growth on the welfare of (a) X? (b) Y? (c) Z?