This question uses the Specific Factors Model. Assume, that

India produces two goods, A and M, and that Italy is small in the world,

so it takes world prices as given. A uses land (T) and labor (LA); M uses

capital (K) and labor (LM). Labor is mobile so L = LA +LK but K and

T are only used in one sector.

(a) Draw the PPF (put M on the horizontal axis) and show the trading

equilibrium. That is, show the point of production, the point

of consumption, imports, exports, and the world price line (budget

constraint). What does the slope of the world price line represent?

(b) Now assume that the world price of manufactured goods pM goes up.

What happens to the production point? What happens to imports?

If you are a landowner, does your rent (your income) rise or fall?

Explain.