3. The equations defining a model of two trading nations are given by Y, = C, + 1 + X, - M, Y, = C, + I+ X, - M, C, = 0.7Y, + 50 I = 200 C = 0.8Y, + 100 I = 300 M, = 0.1Y, M, = 0.3Y, Express this system in matrix form and hence find the values of Y, and Y3. Calculate the balance of payments between these countries.

If money is a neutral medium of exchange, as Adam Smith defined it, why does money today divide nations?  Draw 2 analogies explaining this situation, by using Adam Smith’s arguments?

For all questions, refer to the graph on the reverse side.  Use this graph for 1 – 4.  The graph represents the market for coffee.  Estimation may be necessary, so show work.   Assuming the market outcome, and a world price of $6.50 calculate the following:  Price = $6.50 Qddom = 60 units Qsdom = 160 units Imports or exports = Qs is greater than Qd so the country ia an exporter. Export is 100 units Redo all parts of #1 assuming a world price of $3.50.  Redo all parts of #1 assuming a world price of $3.50 and a tariff of $0.50.  Redo all parts of #1 assuming a world price of $3.50 and a quota of 60.

Suppose we are considering a HO model setting, where countries have not yet opened up to trade. Two goods are produced exclusively by domestic labor supplies, tires and vehicle frames. Suppose a tire is labor-intensive in production whereas constructing vehicle frames is a capital intensive task that more frequently features automated machinery. Home and foreign maintain the following capital (K) and labor (L) endowments. Factor L K Home 1120 575 Foreign 1680 950 Suppose these countries transition into a free trade scenario. Using the previous details about both countries, perform the following tasks. (i) Sketch a world relative price, CPC line, through your bundle such that it passes through the PPF (it will have no tangency to PPF). (ii) Using this CPC line, with its fixed slope, shift the line until it is perfectly tangent with the indifference curve. Update your sketch with this newly labeled CPC. (iii) Correctly label the equilibria points at which Home consumes and produces. (iv)…