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Consider a world composed of two countries (Home and Foreign) producing two goods (computers and shoes) using two factors (capital and labor). Assume that Home is capital abundant and computers are capital intensive. What is the impact of trade liberalization on the factor intensities in each sector?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

1. The Heckscher Ohlin model Home and Foreign have twoproduction factors, skilled and unskilled labor and produce twogoods, textiles and computers. Home is skilled labor abundant,and computers are skilled labor intensive. Starting from asituation of autarky, the two countries liberalize trade. Assumingthat the two countries produce both goods before and after tradeliberalization, answer the following questions:

  1. (a) What is the effect of trade liberalization on the relativeprice of com- puters at Home and in Foreign?

  2. (b) What is the effect of trade liberalization on the output ofcomputers and textiles at Home and in Foreign?

  3. (c) What is the effect of trade liberalization on aggregatewelfare in the two countries?

  4. (d) What is the effect of trade liberalization on the realfactor returns in Home and Foreign? Please provide a graphicalexplanation for your argument. What is the name of this famousresult?

2. The Heckscher-Ohlin model Recently, computer programmers indevel- oping countries like India have begun doing some workformerly done in the United States. This shift has undoubtedly ledto substantial pay cuts for some programmers in the United States.Answer the following two questions:

  1. (a) How is it possible, when the wages of skilled labor arerising in the United States as a whole?

  2. (b) What argument would trade economists make against seeingthese wage cuts as a reason to block outsourcing of computerprogramming?

3. The Heckscher-Ohlin model This question asks you to reviewsome of the empirical tests of the Heckscher-Ohlin model.

(a) Explain how the Leontief Paradox and the more recent resultsby Bowen, Leamer and Sweikauskas discussed in class and in thetextbook contradict the predictions of the Heckscher Ohlinmodel.

(b) In the discussion of empirical results on the HeckscherOhlin model, we noted that recent work suggests that the efficiencyof production factors differ across countries. Explain how thiswould affect the concept of factor price equalization.

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.

Draw the graph carefully. Please use one graph per country and show both the autarky and the free trade equilibrium on each graph.

Consider the following data on the factor endowments of two countries A and B:

 

Countries

Factor Endowments

A

B

Labor force: L

100 workers

50 workers

Capital Stock: K

60 machines

10 machines

a. Which country is relatively capital abundant? Which country is relatively labor abundant? Explain (calculate the ratios).

b. Supposing that cars are capital intensive relative to shoes, which country will have a comparative advantage in the production of cars? Of shoes? Explain.

c. Graphically demonstrate the pre-trade and post-trade equilibrium between these two countries (production and consumption points). Draw a Demand Diagonal. Find and label the trade triangles for each country.

d. Which factor gains and which factor loses when trade arises between these two countries? Explain precisely.

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