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International Economics for Basic Trade Models

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1. Consider a world of two goods, automobiles and lumber, and two countries, the United States and Canada.

a) Using the Basic Trade Model, graphically depict autarky equilibria for the two countries in which the United States has a comparative advantage in automobiles.

b) Next, assume that acid rain in Canada is an increasing function of automobile production in the United States (Canadian automobile production is assumed not to contribute to the Canadian acid rain problem). Will a move from autarky to free trade worsen or improve that acid rain production in Canada? Support your answer with a graph.

c) Finally, describe graphically a production subsidy policy which, if pursued by the United States government, could keep Canadian acid rain at its autarky level and still allow the United States to enjoy some of the gains from trade with Canada.

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International economics for basic trade models are determined. The autarky equilibria for the United States and Canada is determined.

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