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Suppose Home produces two goods: Services (S) and Manufacturing (M); and Home exports services. a) Draw Home's production possibility frontier (PPF). Given the world relative
Suppose Home produces two goods: Services (S) and Manufacturing (M); and Home exports services. a) Draw Home's production possibility frontier (PPF). Given the world relative price of Ps/Pm, depict the free trade equilibrium output mix and label it Q, and depict production levels for services and manufacturing (QS and Qm) b) Label the consumption mix (C) and depict the consumption levels for services and manufacturing (C S and Cm) c) Now suppose that there was a structural change in the global economy and the demand for services increases, and hence the world relative price for services (PS/Pm) increases. i) Show this change (the increase in the world relative price for services, (Ps/Pm)) on the graph. Label clearly the new relative price, (PJPm)*, the new production point, P*; and new consumption point, (3*. Explain your answer. ii) How has Home's terms of trade (Pexports) changed? Pimports
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