A free-trade equilibrium exists in which the United States exports machinery and imports clothing from the rest of the world. The goods are produced with two factors: capital and labor. The trade pattern is the one predicted by the H-O theory. An increase now occurs in the U.S. endowment of capital, its abundant factor.
a. What is the effect on the shape and position of the U.S. production-possibility curve?
b. What is the effect on the actual production quantities in the United States if the product price ratio is unchanged? Explain.
c. What is the effect on the U.S. willingness to trade?
d. Assuming that the U.S. growth does affect the international equilibrium price ratio, what is the direction of the change in this price ratio?
e. Is it possible that U.S. national well-being declines as a result of the endowment growth and the resulting change in the international price ratio? Explain.