Suppose that the home country is relatively abundant in low-skilled workers and the foreign country is relatively abundant in high skilled workers. Suppose the economy can produce two goods: textiles and computers. The computer industry is relatively capital intensive and the textile industry is relatively labor intensive.
A. What good does the home country have a comparative advantage in producing? Explain.
B. Draw the production possibilities frontier for the home country. Label the autarky point of production. Show where the country will likely produce and consume in the long run after the country open up for free-trade. Depict the trade triangle. Explain.
C. In the model you just described, is the country better off on average or worse off? Is there anyone worse off if so who?