I. The Ricardian Model<\/p>\n
1. Answer the questions below using the information given by the following table.<\/p>\n
Home Foreign Absolute<\/p>\n
country country advantage<\/p>\n
Number of bicycles<\/p>\n
produced per hour 4 2 ?<\/p>\n
Number of snowboards<\/p>\n
produced per hour 6 8 ?<\/p>\n
Comparative advantage ? ?<\/p>\n
a. Complete the above table.<\/p>\n
b. Which country has an absolute advantage in the production of bicycles?<\/p>\n
c. Which country has an absolute advantage in the production of snowboards?<\/p>\n
d. What is the opportunity cost of bicycles in terms of snowboards at Home? What is the<\/p>\n
opportunity cost of bicycles in terms of snowboards in Foreign?<\/p>\n
e. Which product will Home export and which product will Foreign export? Briey explain<\/p>\n
why.<\/p>\n
2. Assume that Home and Foreign produce two goods, televisions and cars, and use the<\/p>\n
following information to answer the questions.<\/p>\n
In the no-trade equilibrium<\/p>\n
Home country Foreign country<\/p>\n
WageTV<\/p>\n
= 12 WageC<\/p>\n
=? Wage<\/p>\n
TV<\/p>\n
=? Wage<\/p>\n
C<\/p>\n
= 6<\/p>\n
MPLTV<\/p>\n
= 2 MPLC<\/p>\n
=? MPL<\/p>\n
TV<\/p>\n
=? MPL<\/p>\n
C<\/p>\n
= 1<\/p>\n
PTV<\/p>\n
=? PC<\/p>\n
= 4 P<\/p>\n
TV<\/p>\n
= 3 P<\/p>\n
C<\/p>\n
=?<\/p>\n
a. What is the marginal product of labor for televisions and cars in the Home country?<\/p>\n
What is the no-trade relative price of televisions at Home?<\/p>\n
b. What is the marginal product of labor for televisions and cars in Foreign? What is the<\/p>\n
no-trade relative price of televisions in Foreign?<\/p>\n
c. Suppose the world relative price of televisions in the trade equilibrium is PTV =P<\/p>\n
C<\/p>\n
= 1.<\/p>\n
Which good will each country export? Briey explain why.<\/p>\n
d. In the trade equilibrium, what is the real wage at Home in terms of cars and in terms<\/p>\n
of televisions? How do these values compare with the real wage in terms of either good in the<\/p>\n
no-trade equilibrium?<\/p>\n
e. In the trade equilibrium, what is the real wage in Foreign in terms of televisions and in<\/p>\n
terms of cars? How do these values compare with the real wage in terms of either good in the<\/p>\n
no-trade equilibrium?<\/p>\n
f. In the trade equilibrium, do Foreign workers earn more or less than those at Home,<\/p>\n
measured in terms of their ability to purchase goods? Explain why.<\/p>\n
3. Why do some low-wage countries, such as China, pose a threat to manufacturers in<\/p>\n
industrial countries, such as the United States, whereas other low-wage countries, such as Haiti,<\/p>\n
do not?<\/p>\n
II. The Specic-Factors Model<\/p>\n
4. In the specic-factors model, assume that the price of agricultural goods decreases whereas<\/p>\n
the price of manufactured goods is unchanged (PA=P<\/p>\n
A < 0 and PM =PM = 0). Arrange the<\/p>\n
following terms in ascending order:<\/p>\n
RT =R<\/p>\n
T RK =R<\/p>\n
K PA=P<\/p>\n
A PM =PM W=W<\/p>\n
5. Suppose two countries, Canada and Mexico, produce two goods, timber and televisions.<\/p>\n
Assume that land is specic to timber, capital is specic to televisions, and labor is free to<\/p>\n
move between the two industries. When Canada and Mexico engage in free trade, the relative<\/p>\n
price of televisions falls in Canada and the relative price of timber falls in Mexico.<\/p>\n
a. Using a graph, show how the wage changes in Canada because of a fall in the price of<\/p>\n
televisions, holding constant the price of timber. Can we predict that change in the real wage?<\/p>\n
b. What is the impact of opening trade on the rentals on capital and land in Canada? Can<\/p>\n
we predict that change in the real rentals on capital and land?<\/p>\n
c. What is the impact of opening trade on the rentals on capital and land in Mexico? Can<\/p>\n
we predict that change in the real rentals on capital and land?<\/p>\n
d. In each country, has the specic factor in the export industry gained or lost, and has the<\/p>\n
specic factor in the import industry gained or lost?<\/p>\n
III. The Heckscher-Ohlin Model<\/p>\n
6. This exercise uses the Heckscher-Ohlin model to predict the direction of trade. Consider<\/p>\n
the production of hand-made rugs and assembly line robots in Canada and India.<\/p>\n
a. Which country would you expect to be relatively labor-abundant, and which capital-abundant? Why?<\/p>\n
b. Which industry would you expect to be relatively labor-intensive, and which is capital-intensive? Why?<\/p>\n
c. Given your answers to (a) and (b), draw production possibilities frontiers for each country.<\/p>\n
Assuming that consumer preferences are the same in both countries, add indierence curves<\/p>\n
and relative price lines (without trade) to your PPF graphs. What do the slopes of the price<\/p>\n
lines tell you about the direction of trade?<\/p>\n
d. Allowing for trade between countries, redraw the graphs and include a trade triangle<\/p>\n
for each country. Identify and label the vertical and horizontal sides of the triangles as either<\/p>\n
imports or exports.<\/p>\n
7. Leontief\u2019s paradox is an example of testing a trade model using actual data observations.<\/p>\n
If Leontief had observed that the amount of labor needed per $1 million of U. S. exports was<\/p>\n
100 instead of 182, would he have reached the same conclusion? Explain.<\/p>\n
2<\/p>\n
8. Assume that only two goods are produced and consumed in the world economy, shoes and<\/p>\n
computers. Suppose that there are drastic technological improvements in shoe production at<\/p>\n
Home such that shoe factories can operate almost completely with computer-aided machines.<\/p>\n
Consider the following data for the Home country:<\/p>\n
Computers: Sales revenue = PC QC<\/p>\n
= 100<\/p>\n
Payments to labor = WLC<\/p>\n
= 50<\/p>\n
Payments to capital = RKC<\/p>\n
= 50<\/p>\n
Percentage increase in the<\/p>\n
price = PC =P<\/p>\n
C = 0%<\/p>\n
Shoes: Sales revenue = PS QS<\/p>\n
= 100<\/p>\n
Payments to labor = WLS<\/p>\n
= 5<\/p>\n
Payments to capital = RKS<\/p>\n
= 95<\/p>\n
Percentage increase in the<\/p>\n
price = PS =P<\/p>\n
S = 50%<\/p>\n
a. Which industry is capital-intensive? Is this a realistic scenario (i. e. , are some industries<\/p>\n
capital-intensive in some countries and labor-intensive in others)?<\/p>\n
b. Given the percentage changes in output prices above, calculate the percentage change in<\/p>\n
the rental on capital.<\/p>\n
c. How does the magnitude of this change compare with that of labor?<\/p>\n
d. Which factor gains in real terms, and which factor loses? Are these results consistent<\/p>\n
with the Stolper-Samuelson theorem?<\/p>\n
9. In 2008, the Ukraine successfully negotiated terms to become a member of the World<\/p>\n
Trade Organization. Consequently, countries such as those in Western Europe are shifting<\/p>\n
toward free trade with the Ukraine. What does the Stolper-Samuelson theorem predict about<\/p>\n
the impact of the shift on the real wage of unskilled labor in Western Europe? In the Ukraine?<\/p>\n
10. According to the Heckscher-Ohlin model, two countries can equalize wage dierences by<\/p>\n
either engaging in international trade in goods or allowing skilled and unskilled labor to freely<\/p>\n
move between the two countries. Discuss whether this is true or false, and explain why\u2026<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"
I. The Ricardian Model 1. Answer the questions below using the information given by the following table. Home Foreign Absolute country country advantage Number of bicycles produced per hour 4 2 ? Number of snowboards produced per hour 6 8 Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-77353","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/77353","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=77353"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/77353\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=77353"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=77353"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=77353"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}