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ECON 3HH3 Chapter Notes - Chapter 3: Free Trade, Business Cycle, Real Wages

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School
McMaster University
Department
Economics
Course
ECON 3HH3
Professor
Pau S Pujolas

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Document Summary

Chapter 3 gains and losses from trade in the specific-factors model. Specific-factors model: land is specific to the agriculture sector and capital is specific to the manufacturing sector; labor is used in both sectors, so it is not specific to either one. True in the short run that land is specific to agriculture and that capital is specific to manufacturing. In each industry increases in the amount of labor used are subject to diminishing returns the marginal product of labor decline as the amount of labor used in the industry increases. Combining the output for the 2 industries manufacturing and agriculture you obtain a. Ppf for the economy: because of the diminishing returns to labor in both sectors the ppf is bowed out or (cid:272)o(cid:374)(cid:272)a(cid:448)e (cid:449)ith respe(cid:272)t to the graph"s origi(cid:374) By using the marginal products of labor in each sector you can determine the slope of the ppf.

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Related Questions

4. Suppose that the wage is $20 per hour in a two-sector (manufacturing and agriculture) specific-factors model. Currently, the prices of manufactured and agricultural outputs are $5 and $1, respectively; the marginal product of labour in the manufactured sector is 6 units per hour, and the marginal product of labour in the agricultural sector is 10 units per hour. What will happen to the distribution of labour between the two sectors?

a. Nothing will happen. The current allocation of labour between the two sectors is ideal.

b. The manufacturing sector will demand more labour, and the agricultural sector will demand less labour at the current wage.

c. The agricultural sector will demand more labour, and the manufacturing sector will demand less labour at the current wage.

d. Both the agricultural and the manufacturing sector will demand more labour at the current wage.

The home produces two goods, computers and wheat. Capital is specific to computers, the land is specific to wheat, and labor is mobile between the two industries. Home has 100 workers and 100 units of capital but only 10 units of land. Foreign also produces computers and wheat using capital, which is specific to computers; land, which is specific to wheat; and labor, which is mobile between the two sectors. Foreign also has 100 workers but instead has 100 units of land and only 10 units of capital. It has the same production functions as at Home.

Clearly indicate the correct answer in italics for the following question:

The no-trade price of wheat will be higher/lower in Home than in Foreign because Home has more, fewer units of land than Foreign. The no-trade price of computers will be higher/lower in Home than in Foreign because Home has more, fewer units of capital than Foreign.

If the trade is opened, with trade the relative price of wheat will increase/decrease in Home and increase/decrease in Foreign. If the trade is opened, the rental on capital will increase/decrease at Home and the rental on land will increase/decrease in Foreign.

Assuming a two-country, two-good, perfect competition model of trade with multiple factors, and mobile labor but specific other factors. Suppose that country finds that with trade the relative price of one of the goods it produces, say machines, has decreased. If machines are produced using capital and labor, and the other good, textiles are produced using land and labor. Explain clearly what happens to the fortunes of these four groups as a result of trade: Owners of labor employed in textiles, owners of labor employed in machines, owners of the land, and owners of capital. Which of these groups, if at all any, would be opposed to trading?