Draw for Nation 2 a figure analogous to the bottom panel of Figure 7.5 under the same assumptions…

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Draw for Nation 2 a figure analogous to the bottom panel of Figure 7.5 under the same assumptions as in Problem 7.

Problem 7

Draw for Nation 2 a figure analogous to the top panel of Figure 7.5 under the following assumptions:

(a) Nation 2 is now large enough to affect the relative commodity prices at which it trades.

(b) The terms of trade of Nation 2 deteriorate from PY /PX = 1 with free trade before growth to PY /PX = 1/2 with growth and free trade.

(c) Nation 2 exports 140Y with growth and free trade.