Basic Macroeconomics problem solving - 30 minutes max.

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Experience Level: Entry
Assume that a country produces two goods, food (which requires land and labor) and machinery (which requires labor and capital), and is currently in autarky equilibrium. The country just finds that the international price ratio of food relative to machinery, i.e., Pfood/Pmachinery, in the world market is lower than the price ratio in its domestic market.
a. Should this country trade? If so, which product should it export?

If
b. Will it gain from trade? Illustrate your answer graphically using production-possibilities frontier (PPF) and indifference curves. In the same diagram, identify the trade triangle, including export and import quantities.
c. How are the real wages in terms of food and machinery, respectively, affected by trade?
d. How is the real rental of capital affected by trade? What about the real rental of land?
e. Discussion: Among labor owners, capital owners, and land owners, who would be the most likely to support trade in this case? How will this country’s income inequality likely change as a result of trade?

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