Determine 2 main countries (Foreign and Home) that form the goods 1 (with capital and labor) and 2 (with land and labor) according to the production functions described in the problems 2 and 3. Initially, both countries have the same supply of capital, labor (100 units each) and the land. The capital stock in the Home then grows. This change shifts out both the production curve for good one as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2.
1. Demonstrate how the increase in the supply of capital for Home affects its production possibility frontier.
2. On the same graph, illustrate the relative supply curve for both the Home and the foreign economy.
3. If those two economies open up to trade, discuss what will be the pattern of trade?
4. Explain how opening up to trade affects all three factors (capital, labor, land) in both countries.