ECN 306 Exam Solutions Fall 2018: International Trade, Physical Capital, Demand Curve

1. Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef? Explain.

(b) What is the opportunity cost of wheat in each country?

(c) What is the opportunity cost of beef in each country?

(d) Analyze comparative advantage and opportunities for trade between the U.S. and Argentina.

2. Suppose that China is labor-abundant country and U.S. is capital-abundant country. iPad is capital-intensive and cloth is labor-intensive. Show that U.S. exports iPad after opening up to trade using Heckscher-Ohlin model.

3. Explain the immiserizing growth using standard trade model.

4. Consider the following Heckscher-Ohlin model: there are two countries, America and China, two goods, high-tech manufactures and low-tech manufactures, and two factors of production, skilled labor and unskilled labor. America is skilled-labor abundant and China is unskilled-labor abundant. High-tech manufactures are skilled-labor intensive and low-tech manufactures are unskilled-labor intensive. What happens to the price of high-tech manufactures relative to the price of low-tech manufactures in America following trade?

3. Consider a country A that is closed to international trade. Suppose that when this country opens its borders for trade and allows market forces to work freely, it begins to import textiles, a labor-intensive good.

a. What does this imply about country A's factor endowments and why? 

b. What is likely to be the effect of trade on wages? Explain why? 

c. Which group of citizens in country A would you expect to support free trade and why? Why would oppose free trade and why?

a) In a two-factor, two-good heckscher-ohlin context, illustrate and explain "production effect" of growth in the labor force in a relatively capital-abundant country, other things equal.

b) In the situation of the labor force growth in part (a) above, suppose that the country is a "large" country. Define the meaning of a "large" country in international trade. Then, and assuming that the "net" or "overall" effect of the labor force growth in part (a) is of the same type as the "production effect," illustrate and explain, other things equal, the impact of that labor force growth on the country's willingness to trade and the country's terms of trade.