Suppose the world consists of two countries, Home and Foreign, which produce two goods,

Bread and Fruit, using two factors, capital and labor. Suppose that Home has 60 units of labor

and 40 units of capital while foreign has 30 units of labor and 110 of capital.

Assume that the unit input requirements are given by the following in both countries:

Bread F ruit

Labor

10

5

Capital

5

10

Moreover, suppose that both goods are perfect substitutes and everyone has the same prefer-

ences.

i. Draw the relative demand for Bread relative to Fruit.

ii. Draw the PPF and the relative supply for Bread relative to Fruit for Home.

iii. Draw the PPF and the relative supply for Bread relative to Fruit for Foreign.

iv. Draw the PPF and the relative supply for Bread relative to Fruit for the world under trade.

v. Does trade do anything in this example? Explain why