Standard Trade Model

Standard Trade Model - for the whole world Show the world...

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Standard Trade Model Consider a world with two countries, Home and Foreign, which engage in free trade with one another. Each country produces two goods, candy (C) and flower (F). Suppose also that consumers in Home and Foreign have identical homothetic preferences. Part A: Using bowed-out production possibilities frontiers for Home and Foreign, draw a free trade equilibrium consistent with Home exporting candy and Foreign exporting flower. For this, draw three graphs: a ppf for home, a ppf for foreign, and a RS and a RD curve
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Unformatted text preview: for the whole world. Show the world equilibrium price and show production points, consumption points and indifference curves for each country given the world equilibrium price. Part B: Suppose Home experiences an export-biased growth. Redo part A. Show the change of Home’s terms of trade (TOT), higher or lower than before? Does this export-biased growth help or hurt Home’s TOT? What about Foreign’s? Explain....
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