c. Suppose Canada and France are initially not trading with
each other and are producing at points C and F,
respectively. Suppose when trade is introduced, the free-
trade relative prices are shown by the slope of the dashed
line. Show in the diagrams which combination of goods
each country will now produce.
d. In this case, what will be the pattern of trade for each
country?
4. The following diagrams show the Canadian markets for
newsprint and machinery, which we assume to be competitive.
a. Suppose there is no international trade. Show on the
diagram the equilibrium price and quantity in the
Canadian newsprint and machinery markets.
b. Now suppose Canada is open to trade with the rest of the
world and the world price of newsprint is higher than the
price of newsprint from part (a). Show in the diagram the
quantities of domestic consumption and production and
the quantity of newsprint that is either exported or
imported.
c. Similarly, suppose the world price of machinery is lower
than the price of machinery from part (a). Show in the
diagram the quantity of domestic consumption and
production and the quantity of machinery that is either
exported or imported.
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