Consider a model with two countries, Home and Foreign, that each produces two goods, book, and food, using two inputs, labor, and land. Assume Home in land abundant and production of book is labor-intensive.

a) Draw a PPF for each country as well as the relative demand/Supply picture. Assume that preference is identical in the two countries.

b) With the standard trade model, we added the use of indifference curve to the analysis. Draw a diagram that shows the production and consumption points for Home, given the assumption that home is land abundant. Be sure to identify imports and exports in your picture.

c) Suppose food-biased growth takes place in Foreign. Use a relative Demand/Supply picture to illustrate the effect this will have on the relative price of books.

d)How will this food-biased growth affect welfare in Home? Using indifference curves in your explanation.Status: Active