Instructions: Answer all parts. Due in class on Friday, February 17. Any combination of handwritten and computer-printed answers is acceptable. If you work with
\nclassmates (and you may do so on a problem set), you must list the names of everyone you worked with. You are also welcome to consult with the professor or TA for<\/p>\n
help.
\n1. Consider a Specific Factors Model, as developed in Feenstra & Taylor chapter 3, applied to South America in the 19th Century. Suppose that as South America becomes<\/p>\n
independent of Spain and Portugal, it \ufffd\ufffd\ufffdopens up\ufffd\ufffd\ufffd to free trade and exports agricultural goods (A) and imports manufactures (M). Agricultural goods are produced with<\/p>\n
land (T) and labor (LA), while manufactured goods are produced using capital (K) and labor (LM). Thus, land and capital are the immobile (specific) factors while labor<\/p>\n
is the mobile factor. a. First, analyze what happens to the equilibrium nominal wage rate W as a result of trade, using a diagram like the figure below, and assuming<\/p>\n
that the price of the export good rises (for convenience, you may assume that the price of the imported good stays constant for this diagram). Label all curves and<\/p>\n
axes completely and explain your diagram carefully (what shifts and why? how does equilibrium employment change?). Also compare the change in the nominal wage with the<\/p>\n
change in the value of the MPL for the export good!
\n(See the Feenstra & Taylor book or the PowerPoint for a larger version of this graph.)
\nb. Also draw a production possibility frontier diagram and show the equilibria for South America in autarky (no trade) and with free trade. Does South America get<\/p>\n
aggregate gains in consumer welfare from trade? Show these gains on the PPF diagram. c. Then, analyze what happens to real wages in terms of each good, W\/PA and W\/PM,<\/p>\n
and explain your answer. Do workers gain or lose from trade, or what does this depend on? i. What general principle does your answer to this part illustrate? d. Next,<\/p>\n
analyze whether the \ufffd\ufffd\ufffdlandlords\ufffd\ufffd\ufffd (owners of land) and \ufffd\ufffd\ufffdcapitalists\ufffd\ufffd\ufffd (owners of capital) gain or lose from free trade. Focus on the real rental rates for land and<\/p>\n
capital: RT\/PA, RT\/PM, RK\/PA, and RK\/PM (you do not have to analyze the percentage changes in RT or RK). i. Does it matter which good the landlords and capitalists<\/p>\n
consume more of, A or M? Why or why not? ii. What general principle does your answer to this part illustrate?
\n2
\ne. Based on your answers to parts b-d. combined, what must be true about the gains to the group(s) that gain from trade in South America compared with the losses to<\/p>\n
the losers? (Hint: are there aggregate gains to South America as a whole? If so, what does this tell us about the magnitudes of the gains and losses to the different<\/p>\n
factor owners?). f. Assuming that the landlords were the richest group in South America in the 19th century, capitalists were the middle class, and workers (labor)<\/p>\n
were the poorest group, and also assuming that workers consumed mostly food (agricultural products, A), did free trade make the region\ufffd\ufffd\ufffds distribution of income more<\/p>\n
equal or more unequal according to this model? Do you think that this pattern of specialization in international trade helped or hindered the long-run economic<\/p>\n
development of South America? Why or why not? Discuss both points briefly.<\/p>\n","protected":false},"excerpt":{"rendered":"
Instructions: Answer all parts. Due in class on Friday, February 17. Any combination of handwritten and computer-printed answers is acceptable. If you work with classmates (and you may do so on a problem set), you must list the names of Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-6725","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6725","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=6725"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/6725\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=6725"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=6725"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=6725"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}