Consider two country (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions described in problem 2 and 3 Initially, both countries have the same supply of labor (100 units each), capital and land. The capital shock in Home then grows. This change shift out both the production curve for good 1 as a function of labor employed (described in problem 2) and the associated marginal product of labor curve (described in problem 3). Nothing happens to the production and marginal product curves for good 2.
Show the increase in the supply of capital for home affects its production possibility frontier.
On the same graph, draw the relative supply curve for both the Home and the Foreign economy.
If those two economies open up to trade, what will be the pattern of trade (i.e. , which country exports which good).