Question

(b) Consider Figure 2 below, where AB and A’B’ represents two production possibility

frontiers. There are two countries viz. 1 and 2. Country 1 and 2 are assumed to be

capital and labour abundant respectively, while good X and Y are assumed to be

labour and capital intensive respectively. Let P and P’ represent autarky equilibriums

of the two nations respectively, and let Q and Q’ be their equilibrium after trade

respectively. Each nation after trade consumes at point E on indifference curve IC.

Further assuming all the assumptions of the H-O theory hold, answer the following

questions:

(i) Which among AB and A’B’ represent production possibility frontier for country

1 and 2 respectively?

(ii) Which country among 1 and 2 will import good X and which will import good

Y?

(iii) Are exports of good X by one country equal to another country’s imports of

good X? What can be said about the

Answer 1

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