Question 2: Heckscher-Ohlin Model Suppose Home country's factor endowments are given by LH = 100, and KH = 300, whereas foreign country's factor endowments are given by LF = 100, and Kf = 100. Both countries have two sectors, manufacturing (M) and agriculture (A), with identical technologies across countries. Suppose the production of agricultural goods is relatively more labour-intensive compared to the production of manufacturing goods. (a) Illustrate the production possibilities frontiers (PPF) of the Home country and the Foreign country in two separate diagrams where manufacturing goods is presented in the horizontal axis. Assume a well-behaved PPF that is concave to the origin. On these diagrams, show the autarky equilibrium, the trade equilibrium, imports, exports, and the gains from trade for both countries. (10) 1 (b) Suppose an unexpected drought globally that increased the world prices of agricul- tural products (APA > 0) while the country is under the trade equilibrium. What is the impact of this change on: (i) Terms of Trade (TOT) of Home country and Foreign country. (6) (ii) Real returns to capital and labour in the Home country. (7) (iii) Relative factor demand in Agriculture and Manufacturing (L/K) in the Home country. Use the relative factor demand curves to analyze. (7) Question 2: Heckscher-Ohlin Model Suppose Home country's factor endowments are given by LH = 100, and KH = 300, whereas foreign country's factor endowments are given by LF = 100, and Kf = 100. Both countries have two sectors, manufacturing (M) and agriculture (A), with identical technologies across countries. Suppose the production of agricultural goods is relatively more labour-intensive compared to the production of manufacturing goods. (a) Illustrate the production possibilities frontiers (PPF) of the Home country and the Foreign country in two separate diagrams where manufacturing goods is presented in the horizontal axis. Assume a well-behaved PPF that is concave to the origin. On these diagrams, show the autarky equilibrium, the trade equilibrium, imports, exports, and the gains from trade for both countries. (10) 1 (b) Suppose an unexpected drought globally that increased the world prices of agricul- tural products (APA > 0) while the country is under the trade equilibrium. What is the impact of this change on: (i) Terms of Trade (TOT) of Home country and Foreign country. (6) (ii) Real returns to capital and labour in the Home country. (7) (iii) Relative factor demand in Agriculture and Manufacturing (L/K) in the Home country. Use the relative factor demand curves to analyze. (7)