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Standard trade model Consider a country that can produce two goods: cars (qc) and bananas (qb). its PPF is nice (concave to the origin) and

Standard trade model

Consider a country that can produce two goods: cars (qc) and bananas (qb). its PPF is "nice" (concave to the origin) and its identical agents have "nice" preferences.

assume the country is a "small" country trading freely at fixed world prices, importing bananas and exporting cars.

  1. draw a plausible PPF, production and consumption points under free trade. Identify imports and exports in your graph. use horizontal axis for bananas

suppose a dictator takes power and bans all trade with the rest of the world .

  1. what happens to the relative price of bananas in this country ?
  2. show what happens to the production bundle ? the consumption bundle ? welfare

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