Assume that there are two countries, Argentina and Brazil, each producing wheat and wine from capital labor. Suppose that Argentina has abundant capital and scarce labor when compared to Brazil; that wheat is capital intensive relative to wine; and that the other factor-proportion assumptions apply.
- Using production possibility frontiers, and indifference curves for Argentina and Brazil, illustrate and explain the movement of both countries to the free-trade equilibrium pattern of production, consumption, trade and the gains from trade for the two countries. That is, explain the sequence of the argument as to how mutually beneficial trade between the two countries is possible.
- Given the above trade between the two countries, explain the trade effects on product prices, and factor incomes. Why do these effects occur?
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