# Sub: Economics

Question:
There is a world with two countries, Canada and India. They produce robots and rugs using capital and labor. Robots are capital intensive and rugs are labor intensive. It is unknown what the supplies of capital and labor are in each country, but it is known that the relative price of robots is higher in India than in Canada in the no-trade equilibria.
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a. Which country is capital abundant according to the Heckscher-Ohlin theorem? b. Given your answer to (a), draw the PPF for Canada. Also draw the indifference curve and the relative price line for the no-trade equilibrium. c. Given your answer to (a), draw the PPF for India. Also draw the indifference curve and the relative price line for the no-trade equilibrium. d. Compare the slopes of the relative price lines for Canada and India that you draw in (c) and (d). What does this comparison tell you about the pattern of trade?

Solution:
a) “A capital-abundant country will produce & export the capital-intensive good, while the labor-abundant country will produce & export the labor-intensive good”. In the above information Robots which is a capital intensive good is costlier in India than in Canada. This implies that Canada is capital abundant country.

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Sub: Economics

b) PPF: Production possibilities is an analysis of the alternative combinations of two goods that an economy can produce with existing resources and technology in a given time period Indifference Curve Robots P* P ** The Slope is less

PPF
PPF

R

R* Rugs

C) Robots Indifference Curve The Slope is less

P* P

PPF
PPF

R

R*

Rugs

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Sub: Economics