Home CountryAs H is relatively L-abundant, H's PPF is relatively biased toward L-intensive X.Before trade, H will consume what she produces. Therefore, the autarky equilibrium is where the indifference curve is the tangent of PPF. H produces and consumes OHXH of X and produces and consumes OHYH of Y. H has IH of utility. |
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Foreign CountryBy the same logic, before trade, F produces and consumes at EF. |
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Remember
From these three facts, it can be conjectured that PX is relatively lower in H and PY is relatively lower in F. Combining the two countries' graphs will give |
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