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March 30, 2017

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2. Consider two countries, Home and Foreign. Assume that Home is labor-abundant while Foreign is land-abundant. Also suppose that there are two industries, wine and cheese, with wine being the more labor-intensive industry.
a) Suppose that both wine and cheese industry produce homogeneous products and are perfectly competitive. What is the pattern of trade between Home and Foreign?
b) Now suppose that the cheese industry produces differentiated products and is therefore characterized by monopolistic competition. Wine industry is still perfectly competitive. What is the pattern of trade between Home and Foreign?
c) Finally, in addition to the assumption of part (b), suppose that Foreign has experienced population growth, and as a result both Home and Foreign now have exactly the same land/labor ratio. Will the two countries trade?

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