Suppose that Canada exports aircraft and imports cloth.
1) Show diagrammatically that if the relative price of aircraft to cloth rises in the international market, Canada’s welfare increases.
2) What do you expect to occur due to substitution effect in the consumption of aircraft and cloth in Canada? Explain using indifference curves.
3) What happens to the welfare of Canadian if biased-growth occurs in cloth industry in the country that Canada is importing from? Explain using PPF.
4) Will the result be different if biased-growth occurs in Canada in the cloth industry?