Country B is a small country that allows free trade with the rest of the world. There are two products, oats and newts. Country B initially can produce oats, but initially it cannot produce newts because it lacks the production technology for newts. Country B consumes some of both oats and newts. (In your graph for Country B, place oats on the horizontal axis and newts on the vertical axis.)
a. Use a graph to show the initial free-trade equilibrium for Country B. (Choose a reasonable free-trade equilibrium international price ratio.) What is the quantity exported and the quantity imported?
b. Now the technology for producing newts diffuses to Country B. Country B then can produce both products, with an increasing cost of trade-off in production. Show on your graph how this changes Country B's production possibilities.
c. Let's examine the new free-trade equilibrium for Country B. Assume that in the new free-trade equilibrium, Country B produces positive amounts of both products. Which of the following is possible? Country B exports oats and/or Country B imports oats. For each case that you think is possible, show it on your graph and use your graph to explain why it is possible.
d. In the initial situation (before the technology diffuses), what was the key driver of the trade pattern? In the new situation (after the technology diffuses), what is the key driver of the trade pattern?