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