Trade-Economics

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1.United States and Mexico have two industries; call them, L-intensive (LIN) and K-intensive (KIN). They have two factors of production: labor and capital. US is a capital abundant country and Mexico is a labor abundant country. At the initial equilibrium, US exports KIN product to Mexico and Mexico exports LIN product to the US. Now suppose that there is a massive immigration from Mexico to the US.

a.Show and explain how this immigration flow will affect each country’s PPFs.

b.What happens to relative supply of LIN to KIN in the world market and why?

c. If we assume that the world production of LIN to KIN falls as a result of immigration flow then what happens to terms of trade and welfare in two countries? Show graphically.

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