Question

Which among AB and A’B’ represent production possibility frontier for country 1 and 2 respectively?

Answer 1

Answer:

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 import and export volume of good Y? (iv) Is trade beneficial to each nation in terms of utility attained? (v) What does slope of line ll’ represent here? OR Figure 2 100 Q P P’ E Q’ Good Y O Good X 20 20 50 80 70 R IC l l' R’ 40 60 75 85

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