Use a diagram when possible. Suppose the country is exporting rice under free trade. Show in a diagram the effects of a decrease in the country's terms of trade on the production mix and the country's welfare. Suppose the country is trading freely with the rest of the world at fixed prices. The technology to produce each good is the same in either country and allows for substitution among inputs.
Cloth production is labor intensive while train production is capital intensive.
England is relatively capital abundant, and India is relatively labor abundant. For the diagram, see a copy of the exam on reserve in the Social Sciences Reference Library. Answer the following questions. Suppose you are looking at the bilateral trade data between US and Paraguay and you discover that the Hecksher Olin theorem predictions do not hold. When the country is large the export subsidy can have a positive effect on the country's terms of trade and the overall welfare effect can be positive.